How much of your payrise should you save

A New Year, a New Me and a New You.  Lots of resolutions have been set and lots will be broken.

One of mine is to increase my average savings rate to 60% for 2015.  It’s barely halfway through January, am I giving up already?  Not yet my fellow cure seekers, not yet.
A New Year and a New Paycheck, it seems The Man is happy with my Excel wizardry and dry office chat and given me a payrise.

“How much should you save?” I ask my biscuit tin.  No answer.  A quick Google of “How much should you save?” comes up with a multitude rules to help you towards saving.  The 50/30/20 rule.  The 70/20/10 rule.  The 10% rule.  

“Save 10%”
A rule of thumb that seems to get thrown about is to save 10% of your paycheck.  By saving a fixed % of our paycheck each month we would implicitly include a proportion of any payrise into our savings.  Which sounds good.

…Example: Save 10%
As a starting point lets have a look at Keith, who saves 10% of his income every month from the age of 25.  The assumptions;
  • Annual salary – £26k
  • Savings rate – 10% of net income
  • Age range – starts working at 25 and retires at 65.
  • Investments earn a real 5% (i.e. above inflation)
  • Keith gets a real payrise of 2% (i.e. above inflation) every year.
Keith would end up with a pot of £333k at the end of 40 years and would have increased his monthly saving to £372 from £172.  With a 4% drawdown he could have an annual income of about £13k.  Not bad Keith, you hero, not bad.

Lifestyle inflation
The sneaky problem with this is that while you are saving 10% of your income and so 10% of your payrises, it also means that you are frittering away 90% of every payrise!
So, on the surface, it seems that Keith is saving hard but he must also be increasing his coffee consumption on the side.  Or is quickly developing an expensive crack habit.

…Example: Save a % of your payrise
Let’s say that Quentin starts work at the same time as Keith, is in the same job, gets the same payrises and invests his money in the exact same way.  Spooky.  But he also puts away 50% of every payrise.

Quentin would end up with a financial nugget of £644k at the end of 40 years and increased his monthly saving from £1,174 from £172.  That’s a whopping 93% increase on Keith!  Well played Quentin, well played.

While Keith’s savings rate has remained at 10%, Quentin’s has increased to 31.5% of his net salary as a result of saving a portion of each annual payrise.  He has nearly tripled his savings rate while still spending more on himself each month.

Barry and Keith – the 50% example

So, if you save more, you end up with more?
Yeah, nice one Mr Zombie.  Save more and I will have more money in savings, my biscuit tin could have told me that.

Yeah, that’s exactly the point.  I think too often we, as a society, use our payrises to treat ourselves for all the hard work that went into achieving it.  Ah sweet, a payrise, I can upgrade my car.  I have certainly been guilty of spending my payrises in my head before I physically have them and I pretty sure I am not alone.

If we could commit to saving a, significant, proportion of each payrise then we are already well on our way to Financial Independence.  Accelerated FI is surely a far better treat than something shiny that will give you some short lived pleasure.

Playing with the numbers
Tweaking a few of the inputs gives us some examples of how powerful this really is.

  1. Increasing the proportion of payrise saved to 75% – Increases the amount saved to £838k
  2. Increasing the proportion of payrise saved to 90% – Increases the amount saved to £955k
  3. Increasing the starting proportion of net salary saved to 20% – Increases the amount saved to £899k
  4. Increasing the starting proportion of net salary saved to 50% – Increases the amount saved to £1.7million 

We could obviously massage the numbers in any number of ways, but what this has driven home is how much of an impact increasing your savings as you get payrises (and so not suffering over arching lifestyle inflation) really has.  It has the power to bring forward FI or drastically increase the potential financial nugget you accumulate for retirement.

Another example, which is very encouraging:

  • Increasing the proportion of payrise saved to 75% but starting at £0 per month – Will grow a nugget of £583k by the age of 65.
So even if someone was struggling to save currently but then committed to saving a, significant, proportion of future payrises they would end up with a substantial nugget at the end.

Hopefully this makes sense and some interesting reading, I was pleasantly surprised just how powerful this was.

I think I will name it the “Finance Zombie Rule”.

Have a good week all.

Spend less, save more and escape the Horde

Mr Z

14 thoughts on “How much of your payrise should you save

  1. weenie

    Hi Mr Z
    Well done on getting that pay rise!
    I'm not guaranteed a pay rise myself but if I get one this year (in March), it will just get rolled up in the 50% that I'm aiming to save, so I'm hoping my savings graph will look like Quentin's, except that I don't have 40 years to save in, more like 10-15 years!

  2. Mr Zombie



    Nah me neither, but we can only hope we get one above inflation every year!
    Good work 🙂 We all like Quentin!

    I really was surprised how much of an impact it, theoretically, has! All about staying motivated.

    10 years to FREEEEEDOM!

    Mr Z

  3. Cerridwen

    I'm due a 2.2% rise this year which is certainly an improvement on the flat line of the last few years. It may well be the last rise I get before I escape in just over 2 years time so I'm hoping to make the best of it and squirrel it all away.

    My monthly savings rate is only about 38% and try as I might I haven't been able to up that so far. Hopefully 2015 will be different but I've just been looking at my budget for last month and it seems Christmas made more of a dent than I thought at the time – must try harder. 🙂

  4. Mr Zombie


    My annual raise last year was pitiful, 0.5% I think. 2 years is so close 🙂

    I have a bit of a dent to pay off from Christmas as well. I reckon there should be something similar to "dryanuary", only for cutting your spending not just drinking!

    Mr Z

  5. Under The Money Tree

    Nice post.

    For about 6 years now I've been saving 100% of any pay rises that have come my way. Once you understand the effect that lifestyle inflation has it's hard to keep committing the same mistake time after time.

  6. Mr Zombie

    100% is amazing. It's crazy the impact LI inflation has. Like you say once it becomes clear it stares you in the face all the time, you want to shout at people for making such a glaringly obvious mistake (like my spelling mistake in my original reply).

    Mr Z

  7. Theres Value

    We just got a payrise too, and we're saving all of it. The way I see it, we can't afford NOT to save it. Like you say, it's easy to buy a few more coffees or upgrade the car or whatever, but then you're back to square one, aren't you?!


  8. Living cheap in London

    The logic of being a FIRE type is that 100% of any payrise should be saved as you are already living well under your earnings with your savings rate upwards of 40%.

    Obviously the emotion of YOLO tends to rear its head around times when you see extra money in your account, & your need to remain strong to resist the temptation to spend.

  9. Mr Zombie

    Hi LCiL,

    I agree – and have just set up a direct debit so that the payrise is sent on is merry way, in full, to my shares ISA.

    Yeah – and there can be a temptation to think "I'll just use the payrise from this month to buy…. and start saving next month" A bad habit to get into.

    Mr Z

  10. Zee

    My rule is to just save 100% of pay raises. I don't know my exact savings rate, but I know that it's over 50% of my income. Basically, I know that if I wanted to have lifestyle inflation I could do it at any time that I wanted, so why would I increase my spending just because I got a raise?

    ..and that's how I save 100% of all raises 🙂


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