Saving Half Of Your Paycheck
I don’t have many regrets from my first thirty years on Earth. However, there is one that makes me wish I had a “mulligan,” or do-over, to relive a decade of my life with a new goal in mind. I read about a 50% savings plan at The Simple Dollar and the concept really intrigued me. According to the plan I would have five years of financial independence banked if I had started when I began my career at twenty years-old.
The 50% Savings Plan
Under the 50% plan workers sock away 50% of their income and live on the remaining 50%. Sounds pretty aggressive, doesn’t it? Could you live on half of your earnings now? How about when you first started your career? There are several benefits to such a plan. First, to live on half of your income you would be forced to make some very conservative decisions regarding major expenses such as housing and transportation. Not much room in this plan for a $1,500 mortgage payment, or a $400 a month new car lease. Second, by saving such a large amount of money so early you would benefit from the compounding growth of that money over a longer period of time. Many times, new workers opt out of contributions to 401(k) plans and other retirement vehicles because they can barely afford their living expenses. It isn’t until they hit thirty or thirty-five that they finally realize they need to be saving for retirement, and at that point they have lost 10-15 years worth of compounding growth.
Path to an Early Retirement?
One of the most exciting aspects of this plan is that for every year you work and faithfully put way 50% of your income, you are “buying” yourself a year without work. In my case, if I had implemented this from the beginning I would have five years worth of 50% earnings in the bank, meaning I could theoretically quit or take a five year sabbatical if I so desired. Of course, to do that the money would have to be saved outside of retirement accounts, so it may make sense to max retirement accounts first and then save the remainder in low cost index funds in taxable accounts. This way some of the money will be accessible before I reached the required age for withdrawal from retirement accounts.
Is It Too Late?
It’s never too late to start the 50% savings plan, but it is so much easier in the beginning. As we get older we get more and more trapped by things like debt, lifestyle, etc, making the very idea of saving 50% of our income seem impossible. Implement this plan early on, before you have the opportunity to acquire such expensive trappings. What if you are like me and find yourself unable to live off half of your earnings? Start paying off debt like a crazy person! Imagine if you didn’t owe a dime to anyone - no car payment, no mortgage, no credit cards, and no student loans. Could 50% of your income provide for food, utilities, medicines, and a few fun purchases each month? Absolutely! And just imagine how much brighter your financial future would be after socking away half of your earnings for the next couple decades.
So what about you? Could you afford to save 50% of your current income?
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This is kind of fun/scary/exciting, and I don’t know if I even have the income to do it. I couldn’t even pay the rent with 50%. I guess that’s a good goal to strive for then — get an income going that would allow you to at least think about trying this.
50 percent is certainly a bold way to save money. I could not have done that straight out of university. I still can’t afford to since I’m still paying off student loans, but like you, I definitely could live off half of my income if I didn’t have to pay rent, car lease payments and student loans…It’s all just a dream for now. One day!
i did that when i was saving up to buy a house. i lived with my mother at the time and was just out of college. i was paid each week and put every other paycheck into a separate account for my down payment.
my only bills at the time were half the groceries, a very low rent payment, and my car payment.
in less than a year i had enough for a 10% down payment and bought the house.
I’m still working to get up to saving and investing 15% of my monthly income as Dave Ramsey suggests in his baby steps! I don’t think I could pull off saving 50% unless I went to an ultra-frugal lifestyle. I belive in being financially wise, but I don’t think I’m ready to go this far. I like articles like this though because they make you stop and think.
Unfortunately, I could not. I would say that I can (and do) live off 75% of my income, but even 65-70% would be a very uncomfortable existence (I’d have to cut ALL fun expenses, never buy any new clothing, not even for work and would not be able to buy any medicines if needed). It’s really rent that kills me. The city I live in is expensive and the consideration of living in a cheaper part of town brings with it a lot of safety concerns.
I think it’s an excellent goal and if I had a home with the mortgage paid off, there is NO reason why that’s not achievable. I think the key is just avoiding lifestyle inflation. If you double your income, you shouldn’t be doubling your expenses too!
Balance. There are three things you can do with money… save it, spend it, and give it. At each stage in life you should be doing some of each.
50% savings seems like a very unbalanced approach. Especially in the early years out of college.
I’ve been conservative with money my whole life, with the only debt I’ve had being student loans & small car payments (and now a mortgage).
I believe my starting salary was $32,000 in 1999. Let’s say taxes take 20% (FICA, Fed,&State). That puts me to $25,600. Health Insurance, say $100/mo, or $1,200 = $24,400.
So, if my take home pay was roughly $24,000, this plan would suggest I save $12,000?
That would give me $1,000 per month to live off of. Being a Christian, I tithe to my church - so take away another 10%, or $3,200. That leaves me with $8,800, or just over $700/month
My rent was cheap at $450 initially (but when the complex was bought it jumped to $625). Utilities for our apt was probably $50. So there’s over 70% of my disposable income…
Gas, auto insurance, car tags, maintenance on cars, that stuff adds up… Food, Clothing?, Christmas & Birthday gifts?, Phone, medical co-pays, and coinsurance, toiletry items. Can I get all that for $200?
Note that this doesn’t include my student loan payment or my small car payment at the time. Those 2 were $200/month in total. There is no entertainment, vacation, visiting relatives, etc included in this either.
So, I think it is great “in theory”, but not practical for recent college grads.
Besides I don’t want to completely sacrifice my 20’s and 30’s so that I can live rich in my 60’s.
That all being said, I’m now in a place where I’m debt free (but the house) and living a content lifestyle, where I can save up $9,000 to pay for a stupid roof on my house without going into debt.
If my income were to double today, then yes I could save 50% of it and live on the rest. Or better yet, I could save 20% and give 30% away.
But I still think the key is balance.
Thanks to the horrid price of living here in D.C., we’re lucky to live on 90% of our income. This idea seems nice, but it’s not practical for anyone living in a coastal city.
If we had no rent/mortgage, student loans or car payments, we’d be able to do it, but that’s just a pipe dream for the next fifteen to twenty years or so. (And yes that includes being frugal and paying down debt as fast as possible. Hurray for $400k houses - and that’s the low end of the market here) Fortunately, hubby’s pension is roughly 50% of his salary so we’d be just about right living off of that and saving any other earnings, interest, etc. when we retire.
I’m constantly amazed at how much money I “think” it takes to live. Just 18 years ago, I lived quite comfortably with my new wife on fifteen percent, yes FIFTEEN PERCENT of what I make now. Where would I be if I had just maintained that lifestyle for the last 18 years? Staying in that mindset is infinitely more easy than going back.
Always remember:
A luxury, once sampled, becomes a necessity.
Be careful what you sample.
HI! This is a good theory, but I have been working for 10 plus years and have never made more than about $20,000 a year (after taxes). My rent alone was $12,000 a year, so I had about $8,000 to live on. I tithed to my church $2,000. So really I lived on about $6,000 a year for the past 3 years. I have recently moved and my rent is down to $600 a month, but my income is now less too.
I am a single mom with two boys and I have always worked as a nanny or in home daycare provider to be with them and not pay daycare myself (which I could not afford anyway.)
We have never gone without any need. We have a running car (it was $300, it needed $500 work, but it does not have air!) We have never gone hungry, and we do lots of fun free and really cheap stuff. Our vacations every year are camping for a 3 day weekend.
Not having so much has been good for us all, my kids are less materialistic and want to send money they get to kids in other countries who have far less than we do.
The point of my tangent is that the time now watching my boys grow up and being home with them is worth far more to me than any savings account. That being said I was too young when I had my first (18.) If I had finished college and waited ten years to have kids then I am sure I could have saved living as frugally as I do now, unfortionately I think many people only live frugally after they have made mistakes and gone into debt, so then it’s not about savings but debt payment. Maybe your blog article will reach someone who has not made that mistake yet.
I enjoy reading your blog! -Becky in NJ
With me being home, I feel like we are already reduced fifty percent, but we are doing it. Could we save fifty percent…honestly, probably not on one income
This is really a great idea though!
Frugal Dad,
For your question, I think my wife and I actually do save somewhere between 40 to 50% of so. I definitely think that is a great goal to shoot for, if it is possible. The biggest thing is cutting out the unnecessary expenses that bring you down.
Great post. I think everyone’s situation is different, but clearly trying to do this earlier in life would have been a lot easier than making it happen now!
I other thing to consider if you did want to go the sabbatical route would be to save 100% of your expenses, not 100% of your income. Same idea, but if you took a year off you wouldn’t need your gross earnings, since some of that is going to savings, taxes, etc.
And while you have me dreaming about a year off, it would also be nice to take advantage of a much lower (or zero) income for the year. I think I’d roll over a few small traditional IRA’s that I have sitting around, since I could do the rollover almost tax free.
As for my wife and I, we’re trying to keep our expenses low and eventually hit the 50% of expenses each year. This target makes us consider the both the income and expense side of the equation. Until then we’re just happy to be blessed by God with a roof over our heads and good health!
I added it up and my wife and I are saving nearly 35% of our income (not counting 401ks which I didn’t bother to look up, maybe 4-5% more). We both recently got raises but our living expenses haven’t really gone up so we’re just saving the extra money. I’m also vigorously paying down the 20 part of our 80/20 mortgage loan on our house.
I also wish I had started saving like this when I was just out of college too instead of just in the past few years.
Here’s the sad part - we’re paying off debt now so we’re sending half of our income to that each month. So, I guess when that’s gone in a few months, we can life of 50%. This is a good article because it really got me thinking about what to do when that debt is gone!
I started my career at 20 and I invested lots but when I left the company I cashed out my 4011k (I know it’s disqusting to think about). If I would have had that now, it would have been at least a year or more that we could have lived on. Oh well, live and learn and know what never to do again!
If I could go back and talk to my younger self, the biggest thing I would want to talk about is money (that, and some relationship advice!)
I got in big debts out of college (much accumulated while I was still an intern making $7,000 a year). I had interesting jobs in academic settings, so my salary was below industry norms and slow to grow. But I was trying to emulate the lifestyle of irresponsible people who made quite a bit more.
I know I could have stashed away a considerable amount, even tiny bit-by-bit, especially if I had put more into my 403b where it was not easy to access. I did eventually put some money into my 403b but I should have started much earlier, and put in money even if it was only $25/month.
I never really blew money on big things like furniture but instead on a constant stream of small things, especially restaurant meals, CDs, and books. I’d like to slap myself around and tell my self that I could treat myself to an occasional coffee out or meal out but that I should _always_ be thinking about how to reduce what I spend and _always_ save something. I don’t know if the old me would have much of an impression, though — I was clearly pretty dense. I did not learn these lessons in childhood (lost all the male role models in my life early on, and my working mom did not really lay it out for me, at least not in a way that made it stick), so I am having to learn them now the hard way. Now at 40 I have to be my own role model.
Now I’m older and make a lot more but I also have a wife and four kids. There’s not a lot we can cut out of our regular monthly expenses: we’re in just about the cheapest housing, driving just about the cheapest car that still moves. But we have gotten through a 5-year debt consolidation plan and are nearly debt free and are starting to put real money into savings. I don’t think we can manage 50% (at least not with a teenager eating out of our food budget) but we might be able to get to 30%. That’s what I’m shooting for and I’m excited by the prospect!
I guess whether or not you can depends on your income
By choice, I only work 4/days/week - wanting time for family/grandchildren. It’s a low income rural area. My takehome pay is about $1000/month… not a lot. Luckily my house is paid for, but property taxes and insurance take up $200/month, and the necessary repairs about another $200/month - old house needs it. So I’m down to about $600/month right there. I save 20-30%/month $200-$300/mo. That’s about as good as it’s going to get and still allow me to eat and put gas in the (paid for) car 
Good ideal to strive for tho - I’ll have to see what I can do to get closer to that goal - but then I’m under 10 years til retirement now… I call this 4 day work week my semi-retirement - and don’t want to give up the quality time - at my age, time is more precious than money, and I think I have enough money squirreled away
Are you talking about 50% after gross or net? I know that if it was 50% based on gross I would be hard pressed to do this after 30% is taken out for taxes and medical and 10% is taken out for tithe. That would only actually leave 10% to live on as you would be saving the rest.
Thanks for the pressure and motivation, Frugal Dad!
I’m one day away from making my first Roth IRA contribution and five away from my 20th birthday. I love this idea, but sadly it’s not possible for me yet — I’m still working my way through my undergraduate studies at the moment. (Also looking at big loans for medical school if I can manage to follow my dreams.)
However, I may just go grab my benefits newsletter and email HR for my current job and see if I can’t participate in the 401(k) yet. (I was never sure since I’m only part time.) I guess even 5% is better than nothing at this point.
I will be living on half of my husband’s income during his deployment, however. I’m sure that won’t last once he’s back, sadly, since he’s more of a spender than a saver.
@Amy: It’s up to you. I guess I was thinking gross, so if you earn $80k try to live on $40k. In other words, act like you earn $40k even if you earn twice as much.
We’ve done this twice during our marriage.
The first time, we lived on my husband’s income and dumped all of mine on our debt and mortgage.
Then my husband quit his job to go back to grad school and we lived soley on my income.
My husband got a job, and by this time we had no debt except our mortgage so we started saving my income… then I got pregnant, we BUILT a house with a GIANT mortgage… and started to bank all my income and then I got pregnant with TWINS!
Now I’m a stay at home mom… and we never could have afforded it if we hadn’t known what it was like to live on 1/2 our total income in those early years.
Someday, I’d like to try to get to that 50 percent savings mark again… but for now, we just can’t swing it.
We actually did this for many years after college. Now we’ve been able to scale back and save very little without any negative consequences. I’d recommend it anyone who is young.
Stupid Student loans! Jaci and I save/invest about 40 percent of our income. We have a mortgage, car payments, entertainment, cable, utilities, electric, food expenses, etc. It has never been a problem for us, I guess. Gasoline prices are making things a little tough to save at this rate, but I think we can make it work if it stays below 5 dollars.
If only we did not have student loans we could save 50 percent like it was a piece of cake. I don’t wish them on my worst enemy!
When ever this subject comes up everyone complains that they don’t make enough. But I don’t think that’s the point. The point is that we should make savings the first and foremost over everything. When you make savings the main goal all other things fall into place. When you have savings debt is far less scary, savings helps keep Murphy at bay, and as someone said have a substantial cash is the softest pillow they’ve ever had.
[...] written about the 50 Percent Savings Plan before, and when thinking about it I find myself wishing I had a time machine to go back and start [...]
[...] is to start saving something–any amount you can scrape together. You don’t have to be saving half of your income for your savings plan to be worthwhile. As your savings accumulate you will slowly become less [...]
My husband and I pay 50% of our takehome to health insurance for our family and his ex-wife, alimony and child support. We are both self-employed. We also tithe 10%. However, we are able to still save about 15% of our gross income. We’ve had our house for about 8 years now on a 15 year mortgage. Once the kids grow up and are through college, we should be free of child support and mortgage payments. Then we can really save!
I am doing this right now - and I’m starting out young, so I think you’re right about that. This is my first year working year-round; I’m taking 16 months off of my degree to work for a major corporation, then going back to finish my degree. But I still live like a student. After taxes, 1/2 of one pay cheque pays rent, 1 full pay cheque goes into savings, and the other half pay cheque covers my expenses. Essentially, after housing costs, I live on $650 a month. I don’t feel like I’m suffocating either…just living the way I always have, except now I have a savings account and RRSP savings that are increasing, not decreasing or remaining constant.
You CAN and SHOULD live on half your income. I graduated from college four years ago. My husband and I have an infant. We live only on his salary. I make just as much as he does but we bank that every month.
I always dismissed the idea of saving lots of money as a dream but it isn’t. If you dismiss it, you’ll never actually work your budget down far enough.
I have passive revenue streams from online content that helps to subsidize our housing payment. Eventually it will pay for it all together. In a few months, we’ll have no car payment. We reduced our food expenses by more than 50%. I work from home and we have no daycare expenses.
All of that was done without sacrificing our way of life. As a matter of fact, it makes life simpler because we don’t worry about money. I know that every dime I make is for me. Not the grocery store, the car company, or anyone else. That makes me happy and it makes work take on a whole new meaning.
Hi,
I realize this is an old post, but I wanted to add a comment:
I think if most of us examined our debts (mortgage, car payment, student loans, credit card payments, etc.), they are probably close to or exceeding 50% of our income. Ours comes in at just below 50% of our income. So what we have done is committed to putting 50% of our income toward debt until it is paid off. So even as payments decline, or things get paid off, we will continue to put 50% of our income toward debt (every other paycheque). Once we are debt-free, including our mortgage, we will then take that same amount of money and invest it. The remaining 50% covers basic living expenses (utilities, food, clothing, etc.). I think if most people did it this way, rather than allowing their lifestyles to inflate as they paid off debt, then it would be easy to live off 50% of your income.