Home Money Personal Finance How Much of Your Pay Should You Really Save?

How Much of Your Pay Should You Really Save?


When talking about financial success and freedom, we can all agree that saving for the future takes up a big portion of that discussion. It’s a critical part of the financial success equation that needs to be addressed from the onset. So, exactly how much are we supposed to save? The answer is, at least 20% of your income should go towards your savings. This is the general consensus when looking at the general ideal rate of saving.

Here is how we break it down:

The 50/30/20 Budgeting Rule

According to the 50/30/20 budgeting rule, popularized by Elizabeth Warren in her book “All Your Worth: The Ultimate Lifetime Money Plan”, our personal net income should be divided into three distinct portions. This very basic rule divides our after-tax income as follows:

  • 50% goes to basic necessities i.e., food, shelter, clothing, utilities, health insurance etc.
  • 30% goes to discretionary spending i.e., lifestyle priorities like eating and drinking out, movies out, the latest gadgets etc.
  • 20% goes to financial priorities i.e., emergency fund, savings account, retirement account etc.,

It is important to note that the percentages above are driven by your net earnings – the after-tax income. Therefore, this rule is a great starting point to determine your savings. To get a clearer picture, draw up your budget and access how much you are spending on these three main areas. To avoid being discouraged,  focus on the percentage of income, not the actual amount. If you earn more and spend less than 80% on necessities and discretionary items, maintain and save the difference.

Why Save 20%?

In order to get a shot at financial independence, you will need to save at least 20% of your income per year earning a return of no less than 7% per year. To get your financial independence number you’ll need to divide your annual spending by 4%, which is considered with safe withdrawal rate. This way, upon retirement you can safely withdraw 4% of your income per year, for an indefinite period without eroding your capital investment.

A 25-year-old, for example, that would like to retire in 25 years, assuming a rate of return of 7% will need to save at least 25% of their income. Withdrawing at 4%, this 25-year-old in 25 years can sustain their current lifestyle indefinitely. This, of course, assumes that their investments will earn a constant 7% throughout the period.

Getting to 20% – an example

Assume that your annual income is Kes 1.2M, the safe withdrawal rate is 4% and you currently have no savings. If you are saving 20% of your earnings you will have accumulated Kes 24M in 29.8 years, at a 7% rate of return (See the red colored text below).

Take a closer look at this table:

At what rate do you need to save in order to retire at the age you would like?

Financial Freedom Fund
Years to Financial Freedom
 6%* 7%* 8%* 9%* 10%*
95% 5% Kes 28,500,000 56.5 50.6 45.9 42.1 39.0
90% 10% Kes 27,000,000 44.7 40.4 36.9 34.1 31.7
85% 15% Kes 25,500,000 37.6 34.2 31.5 29.2 27.3
80% 20% Kes 24,000,000 32.5 29.8 27.6 25.7 24.1
75% 25% Kes 22,500,000 28.5 26.3 24.4 22.8 21.5
70% 30% Kes 21,000,000 25.1 23.3 21.8 20.4 19.3
65% 35% Kes 19,500,000 22.2 20.7 19.4 18.3 17.4
60% 40% Kes 18,000,000 19.7 18.5 17.4 16.5 15.6
55% 45% Kes 16,500,000 17.4 16.4 15.5 14.7 14.1
50% 50% Kes 15,000,000 15.3 14.5 13.8 13.1 12.6
45% 55% Kes 13,500,000 13.4 12.7 12.2 11.6 11.2
40% 60% Kes 12,000,000 11.6 11.1 10.6 10.2 9.8
35% 65% Kes 10,500,000 9.9 9.5 9.2 8.9 8.6
30% 70% Kes 9,000,000 8.3 8.0 7.8 7.5 7.3
25% 75% Kes 7,500,000 6.8 6.6 6.4 6.2 6.1
20% 80% Kes 6,000,000 5.3 5.2 5.1 5.0 4.9
15% 85% Kes 4,500,000 3.9 3.9 3.8 3.7 3.7
10% 90% Kes 3,000,000 2.6 2.5 2.5 2.5 2.5
5% 95% Kes 1,500,000 1.3 1.3 1.3 1.2 1.2
*Rate of return of investing savings

Source: Forbes
Read More: How to Calculate Your Financial Independence Number)

What Are You Saving For?

The above example is based on the income approach i.e., how much can you save now for the future based on what you spend today. However, you can also take another approach to determine how much you need to save. You can do this by determining what are you saving for first i.e., for example, monthly expenses and two vacations a year etc.  Then, from this, you can now estimate how much you’ll need to sustain that particular lifestyle.

Both approaches will yield the same result but different lifestyle outcomes. Keeping the end in mind, you’ll need to work backward and figure out how much you’ll need to save today in order to live the life you want tomorrow. All this will, however, boil down to whether you are willing to live just above the poverty line to get that life quicker or have two homes now and delay that ‘independence’.

Can’t Save Enough?

Think again! Remember, that a little here, a little there…goes a long way. If a higher than recommended percentage of your net income goes to necessities or discretionary items, then take a look at the big spend items. There is a good chance that rent, mortgage or your daily indulgence in eating Gourmet Burgers, is the culprit. The good news is that you can quickly free up some money from discretionary spending. However, with rent or mortgage, you may have to make a big move or simply look for ways to increase your spending.

If you can’t just save up that 20% of your income, then try investing the little you can save. Invest early as getting that head start in your journey towards financial freedom will save you a lot of stress in the long-run. To get you started, start saving, buying a few shares here and there, and investing in the bond market. Long-term investment instruments can yield great returns, in the long run, to compensate for the low capital investment today. In the future, once you hit that 20% sweet spot, keep going and save as much as you can as long as you’re not depriving yourself today.

Summing Up

One thing to keep in mind is that you can’t rely on your raw savings from your income alone. Without investing your savings, inflation diminishes the value of your money over time. Ideally, we should stash our savings in an interest-earning account, compounding exponentially or any other investment that earns you a reasonable return.

That being said, developing the habit of saving at least 20% of your income will eventually land you in financial success. Having a nice savings cushion means that you’ll have more financial security. In the case of an emergency (eg. unemployment or medical costs), you’ll be able to sail through. And yes, you can have those vacations and expensive gadgets too!


Meanwhile, you can click on the following links to read more about financial planning:



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