Why should I contribute a percentage instead of a fixed amount?
One of the main advantages of contributing a percentage is that it allows your retirement savings to grow alongside your income, no matter how much you each in a given month. As long as you're consistently contributing a fixed percentage of your income, your savings will automatically increase as your income does. This strategy can help you save more without having to consciously decide to save more each month.
Another benefit of contributing a percentage of your income is that it can help you maintain a consistent savings rate over time. If you're using a fixed dollar amount to decide contributions, it's easy for that amount to become a smaller portion of your income as you make more money.
Similarly, if you happen to earn less than usual in a month, then you won’t overextend yourself trying to reach for a fixed dollar amount. If you're contributing a set percentage of your income, your savings rate will remain constant. That means you'll to save at a consistent pace even if your income varies.
How do I decide on a percentage?
Your percentage will depend on your goals and circumstances. One option is to contribute a fixed percentage of your income to your retirement accounts each month, such as 10% or 15%.
Alternatively, you could set a target savings rate to guide your contributions. You might aim to save a certain percentage of your income for the year. For example, if your goal is to save 20% of your income for retirement, you could adjust your contributions up and down from your goal as you need each month to ensure your end of year average hits that target.
It's important to carefully consider your own financial situation before deciding on a savings strategy. For many freelancers and self-employed folks, contributing a percentage of income can be an effective and efficient way to build a solid foundation for retirement.