One of the most asked questions concerning money matters is how much someone should set aside from their paycheck. The majority of financial planners will say anywhere from 10-15% of your income. For this exercise, let’s lay the groundwork for our calculations.
In 2016, the minimum wage in California is $10. By 2021, the minimum wage will have increased by $1 every year until it reaches $15 on January 1st, 2021. Let us also declare that the work week consists of the average 40 hours. There are 52 work weeks in the 2016 calendar year, which gives us a total of 2080 work hours (52 weeks * 40 hours). By working at minimum wage, for one year, the total amount of income, before taxes, would be $20,800 (2080 work hours * $10 minimum wage).
If we take a recommended 10% portion of the income, that would be $2,080 ($20,800 a year * 10% savings) a year set aside for saving.
For the sake of argument, lets look at another scenario. A study was published in 1981 that based on a 28 year period of time, the average amount of work hours per calendar year is 2087 hours. The calendar will repeat itself every 28 years, so they were able to determine that there were 17 years that had 261 workdays (2088 hours a year), there were 7 years with 260 workdays (2080 hours a year), and 4 years with 262 workdays (2096 hours a year). In order to achieve the 2087 hours, they used the following formula:
(17 years * 2,088 hours) + (7 years * 2,080 hours) + (4 years * 2096 hours) / 28 years = 2087.143 average hours.
That average has become widely used and accepted to account for the year to year changes in work hours.
Knowing that there are now 3 different amounts of yearly income based on workable hours, we can look even closer at how much 10% is, each year.
There will be 17 years that one should save $2,088 each year.
There will be 7 years that one should save $2,080 each year.
There will be 4 years that one should save $2096 each year.
Over the course of the 28 years, a total of $58,410 dollars will be saved.
If you decide to save 15% of each paycheck, the total amount starts to really jump up.
There will be 17 years that one should save $3132 each year.
There will be 7 years that one should save $3120 each year.
There will be 4 years that one should save $3144 each year.
Over the course of the 28 years, a total of $87,660 dollars will be saved, with just a 5% increase. That 5% is equivalent to $29,250 extra every 28 years or $1,044 a year.
The easiest way I do it, is I generally take hourly rate and multiply it by 2000, as the 80, 88 or 96 isn’t needed for a ball park figure. Then I take 10% of the total and that’s how much I determine can be saved a year. Being able to quickly calculate yearly income can come in handy at times.