The Working Backwards Series: How Much Savings Can I Afford?


The Working Backwards Series?

The Working Backwards Series takes a look at budgeting in each spending category from the standpoint of “how much can I afford given our income, lifestyle and choices?” In this case,  we are talking about a family of four living in Austin, Texas, working toward living in financial freedom, and making $74,000 a year (the average household income in Austin).

To see more from the Working Backwards Series, read this previous Working Backward Series post:  Working Backwards SeriesHow Much Auto Can I Afford? 

Topic For This Post: Savings


It sounds funny doesn’t it? How much savings can I afford in my budget? The fact is that most Americans try to save money AFTER they have paid all their bills and come up woefully short of their savings goals. A better way to save is to budget savings in your spending plan each month to ensure our savings goals are met.

“Those who understand financial freedom learn to save first, then spend what is left.”

Let’s start with a couple assumptions. Let’s assume we are living on a balanced budget (spending less than you earn) and earn about $74,000 a year, which is the average household income in Austin Texas. Let’s also assume that we are a family of four, with dual incomes and just getting started with our savings.  In this scenario, most families can afford up to about 15% of their NSB to go towards savings and investments. 

What Does The Budget Look Like – The Math


A $74,000/year household income equates to roughly $54,750/year after taxes and charitable donations, or $4,563/month. At 15% of our budget going to savings and investments, that’s roughly $685/month for savings or, $8,220/year.  Let’s take a look at our budget  to see if we can meet our balanced budget objective:

Budget (% of Net Spendable Budget by category)

Housing (All Expenses)           30%

Autos                                              14%

Food                                                 12%

Insurance                                         4%

Medical                                             2%

Debt Service                                     5%

Savings/Investments                   15%

Entertainment                                5%

Clothing/Shoes                               5%

Vacation                                            8%

Total:                                           100% of Net Spendable Budget (NSB)

So from a budgeting standpoint, we can make a balanced budget with 15% of Net Spendable Budget going toward savings and investments, without jeopardizing important budget items like housing, autos or food.

But What Are We Saving For?

What are we saving for? Why is it important to dedicate an entire 15% of our monthly budget to savings? It helps to know why we are socking money away each week. It motivates us to keep going when life’s obstacles or temptation gets in our way. That new pair of shoes. That incredible new car deal. That opportunity to travel the world on a whim. All of these situations vie for our precious dollars so it helps to list, specifically, what we are saving for. Here are the top four reasons to save money in our budget.


Emergency Fund

First and foremost is an emergency fund. This is money set aside for true emergencies. An emergency fund is the number one way to keep out of debt. The most successful people I know have the rules written out that both define what an emergency is and how much can be used toward that end. Emergency to me means something that threatens my family, my health or my method of providing for my family. Nothing else.

How much emergency fund is enough? Where do I keep my emergency fund? These are both good questions and the right answers depend on the temperament and situation of the family in question. Most pundits agree that somewhere between three months and twelve months of expenses is the right range for an emergency fund, depending on your risk adverseness. Location of the emergency fund can be anywhere from inside your mattress to secure investments, but key to the location is that the money needs to be accessible and have low risk of losing its value. When you have an emergency, the money must be there.

What does saving an Emergency Fund, (EF),  look like? Since we are just starting out, we want to get $1,000 in the EF immediately and then at a slower pace, build the EF up to 3 to 6 months of savings. So, in month 1, all $685 of savings will go the the EF and most of month 2’s savings as well to get to $1,000. Then we will put $300/month into the EF each month thereafter.


Retirement Savings

The second reason to save is for retirement. There are many theories about how much and where you should save for retirement but the fact remains that we must prepare for life after full time work and/or old age. It is not our children’s responsibility to take care of us when we are old but our own. How much do we save? As a general rule, target 25 times your annual expenses as the amount you want for retirement. And though this amount varies for each individual, there are some smart rules to follow:

  1. Start saving for retirement early, letting compounding help you meet your number.
  2. Take advantage of tax preferred accounts like 401K, SEP and IRA accounts to minimize taxes
  3. Take advantage of employer matching plans and/or other employer retirement benefits

Practically, what does that look like each month? In month’s 1 and 2, all money essentially goes into the emergency fund to build it up to the $1,000 minimum. After that, we will put in 3% ($137) of our NSB into a retirement plan (401K) along with the employer’s match of 2% ($92) for a total of 5% of NSB or $228/month.

images-3Generational Savings

For those raising families or expecting to raise families, we need to be saving for known children expenses, including school, marriage, cars and other events (think prom, field trips, etc) that are assumed to occur. For most of us, this can be done over many years so a slow and steady savings can meet your needs. Why not start savings accounts for each child on the day they are born? I recommend putting $75/month aside for each child from birth. In this example, we have two kids, so that’s $150/month. It’s easy, and by using auto-drafts between my bank and investment accounts, I don’t even see or feel the money leaving my account. Where should we save this money? 529 Plans come to mind for college savings. An Index Mutual Fund or ETF can work for other needs. But they should be separate from our day-to-day funds and take advantage of tax preferred accounts if we know the money will be used for higher education.


Short Term Life Savings

Life happens and it can be expensive. All of us have autos, furniture, appliances and other items that wear out or need upgrading over time. We need to be saving for these eventualities. Since these savings are short term in nature, less than 10 years, the money needs to be invested in something that is safe but hopefully returns more than the cost of inflation. Maybe a safe low cost, low turnover mutual fund or an ETF. Saving $100/month in an index mutual fund allows me to have money available when we need it for new purchases to replace old or worn-out items.


Total It All Up

What are we looking at when it comes to savings as a percentage of net income? When you add it all up, it really is around 15% of our net pay. Wow! Some people even suggest it should be much higher but with two children, we will settle of 15% for now.

The point is that a balanced budget for a family of four on an average household income and with many essential budget categories like housing, auto, children’s needs, etc, does not have much room for savings but we MUST save in order to meet our long term goals and dreams. Plain and simple. While most of American families try to save AFTER they pay all their bills, that method rarely works because there is rarely money left over. In fact,  I believe that trying to save money after bills are paid is one of the major reasons we have more than 75% of households in America living paycheck to paycheck with no savings for emergencies, retirement, college (for the kids) or any money for dreams like vacations or special events (think weddings or cars).

What’s The Solution

Savings must be a part of the monthly family budget. Savings is as important as the rent, food or the auto payments. Why? Because savings (which can be placed in investments) can generate the wealth needed to fulfill goals and dreams. Want to retire some day? Savings is the answer. Want to send your kids to college? Savings is the key. Want to stay out of debt? Saving, in the way of an emergency fund, is the only way to prevent credit card debt when (not if) an emergency occurs. It looks like this:

Emergency fund: $300/month

Retirement: $137/month plus $92/month in company match – Total: $229

Children’s Savings: $150/month

Short Term Needs Savings: $100

Grand total: $779/month including company match on the retirement savings

Many successful personal finance individuals like to turn the savings and spending relationship around. Instead of trying to save what’s left after spending, they say they like to spend what’s left after saving!

Final Word


Living in financial freedom does not allow for families to try and save money from what’s left after spending. It requires us to budget savings along with other important budget categories to ensure savings occurs each month.  Today, we found that a family of four, living on an average Austin household budget can afford to save about $685 per month and save in four broad categories: Emergency Fund, Retirement Savings, Generational Savings and Short Term Life Savings.


While many times we go to the credit card to stretch our spending, going into debt because we have no savings is not the answer. Fight to be credit card debt free. Live on a budget and use cash or a debit card. Some people have the discipline to use their credit card and immediately pay it off, essentially making it like a debit card. Work hard to be patient and only spend money that you have instead of using the credit card company’s money. The temporary enjoyment of buying food or eating out with credit is short lived compared to the lengthy process of paying off the debt. If you must use your credit card and develop a balance in your account. Strive to pay it off quickly so that the exception (credit card debt) does not become the rule. Financial freedom is not easy, but it is worth it.

“The faces all around me they don’t smile they just crack
Waiting for our ship to come but our ships not coming back
We do our time like pennies in a jar
What are we saving for”

(Believe by The Bravery)

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