The younger you’re the more difficult it is to save because your income isn’t very high. However, here are some general guidelines to help you out.

The younger you are the more compounding will help you. 

General Rule: The lower your tax bracket you’re in means contributing to a Roth 401(k) at least in 2020 is better than a traditional 401(k). But ANY savings is good at this point so anywhere you save is great. 

Income Levels and Savings Rate

$10,000 – $40,000: Save ~5-10% – If you work for a company that has a 401(k) and they match a certain percentage of your contributions or salary then you will maximize your savings by contributing as much as you can in the 401(k). If you don’t have any cash for emergencies, first save 1-2 months if you’re single and 3-4 months if you’re married and have kids(s). You’ll increase this overtime but since you’re young you’re typically highly employable. 

$40,000 – $85,000: Save ~10-15%. Same rules apply above but this time you’re increasing your rate. 

$85,000 – $163,000: Save 15~20% – This is where you should be diversifying where you save more. From a Traditional 401(k) to a Roth 401(k) and an investment account for after tax savings. I still like the Roth 401(k) here but I’ve talked to plenty of people that do half and half into each type of 401(k). If you’re near the higher end be aware of the next tax bracket as the federal income tax rate jumps from 24% to 32%. So if you’re on the fringe utilize the Traditional 401(k) so you can reduce your income that year and not get taxed at a higher rate.

General Rule #2: If you’re in the 32% tax bracket then contributing to a Roth IRA or Roth 401(k) is generally not advised unless you think you’ll be in a higher tax bracket in retirement or you think taxes will only go higher from here then utilizing a Roth might be better but paying 32% or more is a hefty price to pay now instead of getting the tax deduction now. 

$163,000 – $207,000: Save 20%-30% -Save rules apply to the previous income bracket but you’ll most likely be contributing the maximum amount to your Traditional 401(k) and then the extra savings into taxable accounts. Your spending habits shouldn’t be increasing dramatically and a great way to keep it in check is to increase your automated savings right when you get a pay increase or bonus. You may start looking at alternative investments like a rental income property. This is a great way to help diversify your investments, get a new income revenue source, possibly reduce your tax liability with depreciation, and grow your net worth.

>$207,000: Save 30% or more – You’ll be maxing out your 401(k) and will still have a large amount left over. Don’t increase your non-discretionary spending and start buying fancy cars and clothes if you want to retire early. This is where you want to begin investing in alternative investments like small businesses, rental properties, and continue to build up your after tax brokerage account.