The Power of Seven: A Complete Guide to the Seven Percent Savings Rule - VSECU (2024)

Saving money consistently over time is one of the most critical things you can do to build long-term wealth. But figuring out exactly how much to save can be confusing for many people. Should you aim to save a set dollar amount every month? A percentage of your income? Just whatever money is left over at the end of each month?

The seven percent savings rule provides a simple yet powerful guideline—save seven percent of your gross income before any taxes or other deductions come out of your paycheck. Saving at this level can help you make continuous progress towards your financial goals through the inevitable ups and downs of life.

In this comprehensive guide, we’ll explore what the seven percent rule is, why saving seven percent of your income can have such a big impact, how to implement the rule in your own finances, and common questions people have about this savings methodology.

WHAT IS THE SEVEN PERCENT SAVINGS RULE?

The seven percent savings rule recommends saving seven percent of your gross salary each year. Gross salary is your income before any taxes, health insurance, retirement contributions, or other deductions are taken out of your paycheck.

For example, if you earn $50,000 per year, you would aim to save $3,500 annually, or around $292 per month. Simple right? By saving consistently at this seven percent level year after year, your money can grow tremendously over time through the power of compound interest.

WHY SEVEN PERCENT?

Saving seven percent of your income may not seem like a lot, especially compared to more aggressive goals like saving 15% or 20% of your income. However, saving at the seven percent level provides two key benefits:

1. It allows your money to grow through compound interest. Compound interest is when the interest you earn begins to earn interest itself. When repeated over many years, even small amounts saved can snowball into significant sums.

1. It aligns with common retirement planning guidelines. Many financial experts recommend saving 10-15% of your income annually for retirement. Since many employers match 3-5% of income in retirement accounts, the seven percent rule gets you well on your way towards meeting typical retirement savings targets.

Of course, you can always save more than seven percent if possible, but saving at this level helps ensure you are saving enough to see meaningful growth.

HOW TO IMPLEMENT THE SEVEN PERCENT SAVINGS RULE

Putting the seven percent rule into action is simple:

1. Calculate seven percent of your gross annual income. For example, seven percent of $50,000 is $3,500.
2. Divide this amount by 12 to get your monthly savings target. In our example, $3,500 divided by 12 equals monthly savings of $291.67, or rounded up to $292.
3. Set up automatic transfers from your paycheck to direct this monthly amount into your savings accounts. Automating your savings is key—it helps make sure you save consistently without having to manually move money each month.
4. Grab any extra income like raises, bonuses, tax refunds or gifts and use them to give your savings a boost. These irregular sources of income can be great opportunities to bump up your savings rate.
5. Review your progress twice per year. Make any needed adjustments to keep working towards your goals. Celebrate your savings milestones along the way!

CUSTOMIZING THE SEVEN PERCENT RULE FOR YOUR SITUATION

The seven percent rule is intended as a guideline, not a hard and fast rule. Your specific circ*mstances may call for tweaking this approach.

For example:

• Recent graduates or those just starting their careers may need to begin with a smaller percentage, like 3-5%, as they establish themselves. You can incrementally increase your savings rate over time as your income grows. The key is developing the savings habit!
• If you got a late start on saving, you may need to play catch up by saving at a higher rate like 10-15% of your income. If possible, maximize your contributions to grow your savings rapidly.
• If you have high interest debt like credit card balances, focus on paying off that debt before directing money into long-term savings. Cutting high interest debt will help you more than savings in this case.
• If your employer offers a retirement match, be sure to contribute enough to get the full match. This is free money you don’t want to leave on the table!
• Consider splitting your savings between different goals like retirement, emergency savings, big purchases, etc. You can tailor your percentages for each goal.

The most important thing is to challenge yourself to save consistently. Automate it so your savings happen effortlessly over time. Grab extra cash, when possible, to give your savings a boost. Develop diligent savings habits now to reap the benefits later.

WHY STARTING EARLY AND SAVING CONSISTENTLY MATTERS

One of the biggest benefits of the seven percent rule is that saving at this level starting early in your career gives compound interest more time to work its magic.

To show why starting early is so critical, let’s compare how savings grow for two people who both save seven percent of their $50,000 incomes, but one starts saving at twenty-five and the other waits until thirty-five to begin:

Tom starts saving $292 per month at twenty-five and continues until age sixty-five. Thanks to compound growth at a 7% rate of return, Tom’s $140,000 in contributions turns into over $766,000 by sixty-five.

Maria waits until thirty-five to begin saving $292 per month until sixty-five. She contributes $105,120, but her savings only grow to around $356,000.

Tom ended up with over double the savings, simply by giving his money ten more years to grow! This example shows why consistent saving early on is so powerful. Time gives your money the chance to work harder for you.

COMMON QUESTIONS ABOUT THE SEVEN PERCENT SAVINGS RULE

Still have questions about implementing the seven percent rule? Here are answers to some commonly asked questions:

Should I save seven percent in my 401(k) or separately?
The seven percent rule looks at your overall savings, so it doesn’t matter if you save specifically in your 401(k) versus another account. If your employer offers a 401(k) match, be sure to contribute enough to get the full match before directing funds elsewhere.

What if I can’t afford seven percent?
If you’re just starting out, beginning with even 1-2% in savings can help build your savings muscle. Raise your rate by 1% each year until you reach 7%. The habit of consistent saving is what matters most.

Does the seven percent rule apply after I max out my 401(k)?
Yes, the seven percent goal looks at your total annual savings, including what you contribute to your 401(k). Should you max out your allowed 401Kk) contributions prior to the end of the year, you will want to continue saving by adding funds to other tax-advantage accounts or savings vehicles.

What if I don’t need as much for retirement, should I still save seven percent?
If you run retirement projections and decide you don’t need to save as much as recommended , you can adjust your overall savings rate accordingly. The seven percent is just a general guideline, so do what makes sense for your situation.

What if I want to retire early?
To retire significantly before age sixty-five, you will likely need to save more aggressively—likely over 15%. Run the numbers to see how much you need to save each month and year to meet your early retirement goal.

The seven percent rule supplies a simple, logical baseline for your savings strategy. While your exact approach should be tailored to your income, life stage, and financial goals, saving at this level can put you on the path to long-term financial security. Start implementing this rule today and let the power of compound interest help grow your money over time!