The problem is that it’s very hard to figure the value of B. It depends on where you live, and how many people there are in the household. The second bigger problem is that disposable income is often not much larger compared to B. In that case, it could be very painful to save using a percentage of your before-tax income number.

I didn’t want to make this post too mathematical. But using math to explain my points may be more clear. Assuming your after-tax income is Y, and your savings is S, and your expenses are E = A * X + B = Y – S. Essentially, I’m suggesting to find and shrink your B (basic expenses). Then you should simply save pretty much everything of Y (after-income tax) – B, using a small value of A term from 0% to 20%. Let’s say you use A=0%, not spending anything beyond B, then your saving will be S = Y – B. Expressed as a percentage number, S = Y – B – A * X = (Y-B) * (1-A), when you make X = Y – B. In that case, your saving is proportional to your disposable after-tax income.

Using my own expense budget as an example, I’ve pretty much cut everything to bare bone, without much amenity or luxury items. Most of the miscellaneous items are budgetted in to give the budget a healthy room (without driving yourself crazy). So if you sum up the expenses, it’s pretty much my B term. And I think that most people will probably have a bigger B term than I do. And then I simply save the rest of all the money minus allowances.

In summary, I advocate not to use percentages for most family because for the median income family, Y is about the same or maybe 20%,30% larger than B. In that case, it’s better to focus your energy on reducing your B, than coming a with a A or the percentage number that simply fits into all the equations.

A savings percentage can be used as a good guideline which can be reviewed/adjusted annually with your spouse when reviewing family budget, etc. From this percentage you will come up with a specific savings target$$ for the month/year which I feel is a better way to come up with a savings number. Per percentage, it may actually force you/your family to seriously consider changing your spending habits or environment to increase the savings percentage as other more prepared families are saving more per their specific income/tax level.

I guess, I simply don’t want to peg a savings number that may be too LOW for the family. I feel the dads/moms out there need to empower themselves to make the necessary changes to save for future childrens education, retirement, or health care costs.

John,
Sorry, I probably confused people by saying pay down. I meant the regular pay down under the 15 or 30 years amortization schedule. And definitely, at times like this, you should not pay additional amount towards your 5% fixed mortgage if you have one. I’ve made additional clarification in my original article.

The only thing I would add is that, while savings are the most important part of saving for retirement, the “what you do with your money” is almost as important. The difference between a return on investment of 6% and, say, 8% over a lifetime of savings can make a huge difference.