The 5% Savings Challenge

January 20, 2020  | By Kevin Smith

Ready to crank up the dial and build wealth faster? The best way to make financial progress is to set an achievable goal and create a system so you don’t have to think about it. Saving an additional 5% seems achievable, right?

Here is an example: two 45 year old couples earn $200,000 per year before taxes. One couple saves 15% per year and the other saves 20% per year. If they both average 8% returns per year, what is the difference in 20 years for the couple who saved more?


This gives the 20% savers some interesting options when they retire:
  • Take $18,304 additional annual income (using the 4% rule)
  • Pay off the mortgage
  • Retire a couple of years early
  • One extra big trip per year
  • Pay cash for a vacation home
Here are easy ways to save the extra 5%:
  • Increase 401(k) contributions by 5% (for the household)
  • Set up an automatic transfers of $833/month to a brokerage account (in this example)
  • A combination of both
Where will the money come from? Here are some ideas…
  • $200/month comes from tax savings if you put these funds into a pre-tax 401(k)
  • One stay-cation per year in place of airline travel and hotels
  • $100/month from subscription services you don’t really use
  • One less out-to-eat night per week (you are trying to eat healthier this year anyway)
  • Create a monthly Amazon budget – if there is one budget to create, this is probably it
Posted in: Saving
Kevin X. Smith, CFA
512.467.2003   |  [email protected]

Kevin is on a mission to find better ways to explain complex concepts in increasingly simple and meaningful demonstrations. Everyone has a different level of interest in learning about investing – ranging from “I just want to know that I…Read More

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