I’m pretty sure “normal” people don’t sit around contemplating such things as “financial math” very much, but I believe it’s important! Understanding the differences between thinking about savings in terms of dollars vs a percentage of salary can have a significant impact on how much you save over the course of your professional career.  Let me explain. 

For most types of savings or investment programs like an IRA, 403(b), or even a bank savings account, contributions are typically based on a stated dollar amount.  This dollar amount is most often fixed and does not change over time or with any increase in income.  In contrast, contributions to a 401(k) or a pension plan (such as the Teacher Retirement System of Texas), are based upon a percentage of your annual salary.   

So, when those making a percentage of salary contribution receive an increase in pay, their contribution automatically increases with that pay raise.  If an employee gets a 5% overall increase, then their contributions to that retirement plan will increase by 5% as well.  However, the employee making fixed contributions must “manually” increase the dollar amount to reflect their increase in pay. 

Each year the federal government typically increases the maximum allowable contributions to retirement accounts.  For example, a person under the age of 50 could make a 2024 traditional IRA contribution of up to $7,000 while the maximum contribution in 2023 was $6,500.  (FYI, the IRS did not increase the maximum contribution amount for IRAs in 2025.) However, not everyone pays attention to this and uses it to their advantage.  

It’s wonderful to make the maximum allowable contribution to your retirement plan, not only for the tax benefits but also for the accumulation of funds to reach your retirement goals.  Doing this automatically by contributing a percentage of salary is a great way to stay on top of new rules and increase your savings over time.  

Of course, you need to focus on having funds to pay for today’s expenses, but don’t neglect saving towards retirement.  Let me reiterate that: SAVE FIRST what you can, then spend the rest.  Pay attention to how much you are saving and make sure that amount increases as your income increases! 

Doing this will add strength to your financial life, help keep your savings increasing as you prosper, and allow you to focus on other important aspects of your life.  There are a lot of good discussions about maintaining a balanced life.  Updating and tracking your savings, whether by a percentage or by fixed dollar, will help maintain that balance.   

Please let me know if you have any questions or thoughts on this subject.  And I hope you and your family have a safe and blessed holiday season.