People often think that trying to save 10% of your income is a good way to ensure you are putting enough money aside for retirement or a rainy day. However, the problem with a percent-based budget is that it minimizes the savings you can achieve because it encourages you to spend more as your income increases.
Although having a higher income level suggests that you can afford to spend more on expenses, this approach will limit the amount of money you could be saving. The other danger is that if your income grows and you have excess funds available, you might be tempted to start living a more lavish lifestyle. If you lose your job or have unexpected expenses to pay you may find it stressful to cut out costs you have grown accustomed to.
Prevention is key, and it could save you a lot of stress later. In order to maximize your savings you should try to find your baseline, the minimum amount of money you need to get by every month. Use your baseline as a budget and try to target that same level of spending and lifestyle regardless of how much you make.
If you have an increase in income that approach will ensure that the extra money goes straight to your savings. By doing this you could be saving well in excess of just 10%, or whatever percentage your goal was. This is similar to investing in companies, you wouldn’t want a company spending more just because it’s making more, you would want to see it take that profit to the bank.