The raise arrives. Then another. A promotion changes the paycheck more than expected. A job change adds another step. Years pass, and income looks considerably different than it once did. Some financial settings remain exactly where they started.
That's how defaults work.
What "Keeping the Same Percentage" Actually Means
Say you set your 401(k) contribution at 8% when you were earning $120,000. Income has since grown to $160,000. The rate stayed at 8%, which means the dollar amount increased automatically from $9,600 to $12,800. That is a real increase.
But look at the other side of the same calculation. Lifestyle spending grew from $110,400 to $147,200. Every dollar of the raise was split at exactly the same ratio: 8 cents to savings, 92 cents to spending. The percentage held, and so did the proportion going to everything else.
A flat savings rate doesn't mean savings and lifestyle balanced out. It means they scaled in perfect lockstep. For someone early in their career, that may be reasonable. For someone in mid-career with rising income and a retirement timeline that hasn't moved, it usually isn't enough.
The goal isn't to save every raise. It's to let savings grow faster than lifestyle over time.
The Concept Worth Knowing: Marginal Savings Rate
Overall savings rate tells you what percentage of your current income is going to savings. It's a useful number, but it doesn't tell you whether things are improving.
Marginal savings rate asks a different question: of the income you've gained over time, what percentage actually went to savings?
Return to the example. Income grew from $120,000 to $160,000, a $40,000 increase. Of that increase, $3,200 went to savings. The marginal savings rate on the gain was 8%, identical to the base rate. Lifestyle absorbed the other $36,800. The overall rate held steady, but nothing improved.
Now consider what moving the needle actually requires. To reach a 10% overall savings rate on $160,000, you need $16,000 saved per year. The gap from $12,800 is $3,200. But that $3,200 has to come entirely from the $40,000 increase, which means directing $6,400 of the raise toward savings. The marginal rate required: 16% on the incremental income.
The new dollars have to work harder than the old ones, because they're pulling the average up.
This is why small bumps at the overall level require meaningful changes at the marginal level. Getting from 8% to 10% overall sounds modest. Achieving it through income growth requires applying roughly double the target rate to the incremental dollars. For someone starting from a near-zero base rate, the math is more direct still. There is no base savings doing any of the work, and the full load falls on the marginal rate.
Vanguard's guidance suggests saving 12 to 15 percent of pay annually for retirement, including any employer contributions. Data from their How America Saves report puts the average participant at 7.3% in employee contributions, already below target before accounting for whether the rate has scaled with income at all.
What the Budget Scan Usually Reveals
Some of this never shows up in the savings rate.
Someone saving a set amount each month often considers the rest of the income accounted for. The savings commitment is in place. But when that person actually maps where the remaining income is going, the picture is frequently different from what they expected. Upgraded subscriptions, more frequent travel, convenience spending and recurring services that arrived with income growth and never got examined. The incremental income from each raise went somewhere. The question is whether it went there by choice, or by default.
The assumption that "I'm already saving, so the rest is fine" rarely holds up when the numbers are actually examined. The savings box is checked. The other 92 cents never got the same scrutiny.
The Income Event as the Natural Review Moment
A raise, a bonus, a job change. Each one creates a brief window before new income settles into new spending. That window is when the marginal savings rate question is easiest to act on: of this increase, what share needs to go to savings to move my overall rate in the right direction?
The answer will be higher than the overall rate you're targeting. That's what the math requires. It's also the reason to ask the question at each income event rather than once a year, when the money has already been absorbed and the decision is harder to make.
Before the new income becomes the new baseline, direct a defined portion of the increase toward savings. As a deliberate decision, made at a known moment, before the default takes over.
For a related framework on recognizing when a financial system has grown past its original design, this post on when your financial system needs a redesign covers the broader pattern.
The rate you started with was a choice. Every raise since then that left it unchanged was also a choice, just not a deliberate one. The next income event is a chance to make it one.
Frequently Asked Questions
What is marginal savings rate and how is it different from overall savings rate?
Overall savings rate measures what percentage of your current income is going to savings. Marginal savings rate measures what percentage of income increases, raises, bonuses, or income growth over time, actually went to savings rather than spending. A steady overall savings rate alongside rising income often means the marginal rate has been low, with lifestyle absorbing most of each gain. The marginal rate is frequently more revealing than the overall rate, because it shows whether increased earning capacity is translating into actual financial progress or simply funding a higher baseline of spending.
How do I calculate my marginal savings rate on a raise?
Take the difference between what you're saving now and what you were saving before the increase. Divide that by the raise amount. If income grew by $30,000 and annual savings increased by $4,500, the marginal savings rate on that raise was 15%. If savings stayed flat in dollar terms, the marginal rate was zero, regardless of what the overall percentage shows.
What if my overall savings rate is already low or near zero?
The marginal savings rate concept is even more relevant in that case. When the base rate is low, the only path to meaningful improvement is a high marginal rate on new income, because there is no base savings doing any of the work. Each raise or bonus becomes the primary lever, and directing a meaningful share of those increases toward savings before lifestyle absorbs them is the most direct way to build momentum.
Does this apply to accounts beyond my 401(k)?
Yes. The marginal savings rate framework applies to any long-term savings vehicle, taxable brokerage accounts, Roth IRAs, HSAs, or other goal-based savings. The account type matters for tax efficiency and access rules, but the underlying question is the same: as income grows, is an improving share being directed toward long-term financial goals, or is income growth being absorbed by current spending?
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D’Agaro Financial Advisory is a Registered Investment Adviser located in Virginia. Registration does not imply a certain level of skill or training. This content is for educational purposes only and is not tax, legal, or investment advice.