What percentage of income should Millennials save? Millennials and women should put 50% of income into savings. Here is why
Save more to close the privilege gap
Women working in male-dominated fields and people of color know this: “if you want to succeed, you ought to work twice as hard and expect half as much recognition.” If we recognize that closing the gap means working harder at work, we ought to save more to bridge the gap in retirement wealth.
For every $1 a man makes, a woman makes 77 cents. This 23% wage gap implies women need to save 30% more than men just to retire at the same level. Women also get promoted less frequently. You would think that a group of people so disadvantaged will try harder to make up for the gap. But the reality is the opposite.
The chart below shows that among Millennials, men consistently save more than women, despite also earning more than women. The irony is that women need to save more than men just to be on the same level.
Why are Millenials, especially women and minorities, not saving as much?
There are a lot of bad messages out there from the media. The system and culture that we live in also systematically oppress certain groups of people in direct and indirect ways. Even the most educated and intelligent women tend to make bad decisions in personal finance. Their excuses include:
Excuse 1: “I need to spend the money to look great, it’s part of my job.” There are many ways to spend money. Smart women know when to invest in solid pieces that last decades. Under no circumstances should you ever spend more than 5% of your take home pay on your image.
Excuse 2: “I need to look fabulous to meet a guy.” If you want to meet a good guy, you should stay healthy (mentally and physically) and keep yourself clean. If you think an expensive dress is going to lead you to meet Mr. Right, you are probably going to end up with Mr. Heartbreak instead.
Excuse 3: “I am going to travel the world to eat, pray and love.” I think working hard and then taking time off to recharge and reward yourself is totally reasonable. But breaking your wallet just to escape reality is just someone making poor decisions on life.
Personal savings rate in the United States, by wealth
The chart below shows that the average personal savings rate in the U.S. is 5.7% by 2016. However, when you split this chart by net wealth, we see a very different story.
The chart below shows the top 1% of Americans is saving over 50% of their income while the bottom 20% of Americans is not saving at all. It is not surprising at all that the top 1% of Americans are almost exclusively white men, and the bottom 20% are disproportionately women and minorities.
What percentage of income should Millenials save? If you want to be like the top 1%, save 50% of income
Save 50% of income may be an impossible task for a single mother with kids, but it is a goal that everyone above poverty level should aim for. Here are three steps you should take to achieve saving 50%.
Step 1: Let’s first recognize that you are doing great already. Life is not easy, and yet despite all the things you have been through, you are still motivated to achieve higher. Women, in particular, have a tendency to blame ourselves for falling short and to not give enough credit to what we were able to overcome. I would recommend that no matter who you are, that you take a moment to love yourself and tell yourself, you are enough.
Step 2: Saving 50% may require you to drastically shift your lifestyle. Are you dining out with friends at places you really cannot afford? Maybe it is time to find new friends who are willing to stay home with you. Are you spending a lot of money on alcohol or clothing to impress others? Maybe it is time to look stop trying to please other people. Can you really afford your lifestyle? Maybe it is time to move.
Make this investment automatic, maximize your 401K first ($18,000), then maximize your IRA ($5500), then continue to invest the rest in a post-tax index fund.
- Vanguard, Fidelity, Charles Schwab all have index funds.
- Betterment and Wealthfront are also great places to put your money.
- As long as your management fees are <0.1%, you should be okay.
Do not try to be smart and pick your stocks. You are gambling. Do not invest in mutual funds that are not index funds. But much sure you have an emergency cash fund (6x your monthly income) set up first.
Millennials: saving problems are emotional problems
Step 4: Invest time to build relationships and health. There are a lot of ways to stop emotional spending, and they involve going back to your roots. Go for a run, take a nap, read a book, cook together as a family, be vulnerable to someone trustworthy and caring, or just reach out to a friend.
Love yourself. Otherwise, shame will take over. What gets you off track of saving 50% isn’t poor self-control, it is the shame of knowing that you are not good enough.
Money problems are emotional problems, the manifestations of shame. You cannot make real changes unless you clear your head first, and accept yourself. The foundation of true happiness rests not taking control of your life and love yourself first.