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The Ten Percent Solution

September 2007

Barbara O’Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management
Rutgers NJAES Cooperative Extension

The 10% Solution takes the math out of saving. And, it makes good financial sense. Simply take your gross pay each period and “drop” the last digit. If monthly gross income is $2,000 per month, save $200. If family income is $60,000 each year, save $6,000 per year or $500 each month. To determine what you need to save, simply determine what 10% of your gross income is on an annual basis and the number of pay periods that you have available to save. For example, if your annual income is $52,000, the annual savings goal is $5,200 (10%) and the required amounts of savings are $100 weekly (52 paychecks), $200 bi-weekly (26 paychecks), $217 semi-monthly (24 paychecks), and $433 monthly (12 paychecks).

The Association for Financial Counseling and Planning Education® and its 800 members are promoting the 10% Solution – a five-year campaign designed to increase the savings rate of Americans to 10%. The percent of income saved by Americans dipped into negative territory in 2005 where it remains today. Simply put, Americans spend more than they earn, financing their spending by depleting savings funds and increasing credit obligations. Like Small Steps to Health and Wealth™, the 10% Solution recognizes that people of average means can build wealth gradually by making small, regular savings deposits.

What can saving do for you? Saving relieves personal stress and improves relationships. Many studies suggest that disagreement over finances is a major reason for marital strife and divorce. And for the unmarried, financial distress is a major factor in general dissatisfaction with life and unhappiness. Studies show that financial stress is not necessarily due to a lack of income but instead is due to unsustainable spending, saving, and investing patterns.

Saving reduces reliance on credit and can save thousands of dollars in interest. The percentage of disposable income used to pay debts is still near record highs. The American Bankers Association reported in 2005 that 43 percent of consumers carry balances each month on their credit cards. Many Americans owe $2,000 or more on their credit card balances, resulting in $45 in interest each and every month at a 15% annual percentage rate (APR) of interest.

Saving helps fund a comfortable retirement. As employers continue to decrease or eliminate pension benefits, private saving is the only remedy for this malady. Social Security benefits will not – nor were they ever intended to -- provide enough income for a sustainable retirement. Saving also increases confidence and the likelihood of getting out of poverty. Persons with even small amounts of savings are more likely to continue saving – even after depleting their savings to zero to meet an emergency.

Saving is habit forming. If saving 10% of your gross income is too daunting, start with 5%. Or 3%. Even small amounts of saving quickly add up. Will 10% of your income be the exact amount that you need to fund future financial goals such as retirement? Probably not, but it’s a great start. To get a more accurate estimate of what you need to save to achieve a specific financial goal, consider using an online financial calculator, such as the American Savings Education Council’s Ballpark Estimate retirement savings calculator at, or hiring a financial advisor to assist you with financial decisions.

Where should your savings go? Consider putting one-half into a retirement plan – 401(k) or (403(b) plan at work, or a traditional IRA or Roth IRA. Save one-third for emergencies – in a savings or money market account. These funds can help pay for unexpected household or auto repairs, medical deductibles, or other unplanned expenditures. Place the remainder (about 17%) in a savings account to fund future goals such as a vacation, roof repairs, or college education.