Putting a portion of every paycheck into savings can be an important step toward building financial security.
Parents, financial professionals and TV pundits like to press that point when they talk about setting lifetime goals, but it’s actually kind of a no-brainer.
Over time, the money you accumulate can help you pay for what you need (a down payment on a home, a car, and eventually retirement income) and what you want (vacations, new furniture, or a college fund for your kids).
But how do you know how much you should be saving every month? If your income, expenses and goals are different from everyone else’s, how do you determine that number? Is $100 a month enough? Or should it be 10 times that amount?
If you’ve been wondering how much money you should save, the answer is … it depends.
Rather than starting with a random dollar amount, it may be helpful to think in terms of a reasonable but consistent percentage of your take-home pay instead.
That’s one of the takeaways from the 50/30/20 budgeting plan made popular by Sen. Elizabeth Warren and her daughter, Amelia Warren Tyagi. It suggests savers should put 50% of their after-tax paychecks toward essentials like rent and food, 30% toward discretionary spending and 20% toward savings.
So, someone who takes home $1,350 every two weeks might put $540 a month into savings.
That’s just a guideline for getting started, though, so don’t panic if putting 20% into savings seems impossible right now. You can start at 10% or bump it up to 30% or more.
Those amounts can shift so you can make your plan work — especially if you have debts like high-interest credit cards, medical bills, or loans that need to be addressed first.
Here are some other points to consider when deciding how much of your income you should save.
It all starts with a budget
Ack. The b-word. Budgeting may be boring, but sticking to a realistic spending plan can make or break a savings plan.
By prioritizing monthly expenses — from keeping a roof over your head to gassing up the car to indulging in a frozen yogurt (or a frozen margarita) every Friday — you may be able to avoid impulse spending and hold on to more of your hard-earned dollars.
One of the ways you can track your spending manually is with a notebook or spreadsheets.
The term “savings” can apply to long and short-term goals
Once you determine what percentage you’ll be able to save from your salary, you may want to break down that amount even further, into separate designated “buckets” or sub-accounts for different goals, which could include things like:
An emergency fund
An emergency fund has the potential to turn life’s potholes into speed bumps.
It’s money you can use to pay for unexpected expenses, such as medical bills, home repairs and fender benders. And your emergency fund might serve as a lifeline if you lose your job and don’t have another source of income.
A good rule of thumb is to save at least three months’ salary — but you don’t have to come up with those dollars all at once.
You could start by saving a small amount each month — and you can always add to the fund when you get a raise, bonus, or tax refund. (You also should be prepared to replenish the fund if you have to use all or part of it at any point.)
The money in your emergency fund could go into a savings account at your local branch bank, or you might want to check out the benefits of a cash management account.
A bucket for short-term goals
Back in the day, your mom or grandma might have talked about belonging to a “Christmas club” — which probably sounded like fun at the time but was really just a holiday shopping fund stashed at her local bank or credit union. (And if Grandma took out the money too early, she paid a penalty.)
Some credit unions still offer Christmas clubs, but you can start your own short-term fund in your account. You can label the account “holiday spending,” or earmark it for any other short-term goal: “Fall Wardrobe,” “Beach Vacation,” or maybe a “New TV.”
And here’s a perk Grandma probably didn’t have: You may be able to set up an auto-transfer from your paycheck and track your progress.
A bucket for long-term goals
Setting aside money for a long-term goal — a down payment on a house, a honeymoon in Bali, a year in Paris with your bestie — can feel like a slow slog. But you may improve your chances for success if you set up an account for the money and designate a consistent amount to slip in there from every paycheck.
Depending on your timeline, you may want to check into a certificate of deposit (CD), or you could stick with that same high-interest online account, which you can build with automatic deposits and link to other accounts with a tracking app.
If you have a 401(k) investment savings account available through your employer, you’re likely already building wealth for retirement with automatic contributions every payday. And if your employer offers any type of matching contribution, you have an opportunity to grow your money even faster.
Beyond that, it’s up to you how big of a slice of your savings pie you want to put toward retirement at any time.
If you’re just starting out, and especially if you have some debts to pay off, saving for retirement may seem like the least of your worries. But the earlier you start putting money away, the faster it can grow through the power of compounding interest.
And time is the investor’s true friend; it allows you to ride the ups and downs of the market without panicking as you work toward your goals.
If you don’t have an employer-sponsored plan—or even if you do, but you want more investment options or maybe more help than you’ve been getting — you can open your own traditional or Roth IRA outside of work. When considering which type of account to open, IRA or 401(k), you might want to keep an eye on what fees might be associated with each plan.
It’s important to note that employer-sponsored plans allow investors to contribute more annually than an IRA would (basic limit in 2020: $19,000 for a 401(k) vs. $6,000 for an IRA). And if the employer offers a matching contribution, that’s essentially free money you wouldn’t get from an IRA.
Deciding on your goals and setting a timeline
Goals are a good thing — they can provide motivation for saving. But they can’t just hang out there; they probably need some prioritizing.
Some goals will be easy to plot on a timeline. For example, if your wedding is in a year and you’re saving $6,000 for your honeymoon, you’ll need to save $500 a month.
Others goals will likely need more finessing. (The amount you might need for retirement, for example, can be tough to pin down.)
But you’ve got this. You’ve probably been editing your mental wish list since you were a kid saving for candy … no, a toy … no, a bike. And you’ll likely be doing that for the rest of your life. If there isn’t enough money, something has to go or, at least, wait.
Could you drive your old car for another year or two if it meant getting a house sooner? Should you work another year before taking time off to be a stay-at-home parent? Would a weekend in Vegas be ok this year if it meant next year’s vacation might be 10 days in Greece? Only you can make those choices.
Deciding how much money you’ll need when you’ll need it, and how long it will take to save it may seem daunting as you start toward each new goal.
But it also can help you stay motivated to note when you’re making headway. And you might even find new ways to cut expenses as you go—especially if you use an app to track your progress.
Don’t forget debt
According to the Federal Reserve Bank of St. Louis, Americans’ credit spending was greater than ever in 2019, and debt levels reached record totals. Overall consumer debt reached $13.9 trillion at the end of the second quarter of 2019, while the total amount of outstanding debt hit $4.1 trillion.
If you’re a part of those statistics, paying off those debts could be the most important part of your saving plan.
Any debt on which you’re paying interest can feel painful. But if you’ve missed some credit card payments and you’re paying the default rate, say 29%, you’re likely putting an awful lot of money toward your past instead of toward your future.
High-interest debt can drag you down, so it’s important to ditch it as quickly as possible. Once you know where you stand with your budget and your savings goals, you may want to start by building a sort of “starter” emergency fund, sometimes called an account buffer — then move forward with a personal debt reduction plan, like the debt avalanche, debt snowball, or the hybrid debt fireball, which focuses on paying high-interest debt in a way that can build momentum and keep you motivated.
Here’s how the fireball method works:
1. Categorize your debts as either “good” or “bad.” (“Good” debts are generally for things that have potential to increase your net worth, like student loans or a mortgage. “Bad” debt is usually considered to be debt incurred for a depreciating asset, like car loans and credit card debt.)
As you develop the list, note all the debts with an interest rate of 7% or higher. This is likely the debt you’ll want to focus on first.
2. List your “bad” debts from smallest to largest based on their outstanding balances.
3. Make the minimum monthly payment on all outstanding debts, then funnel any excess funds to the smallest of your “bad” debts.
4. When that balance is paid in full, go on to the next smallest on the bad-debt list. Blaze through those balances until all your “bad” debt is repaid.
5. When that’s done, keep paying off your debt on the normal schedule while also putting more into various savings strategies that will help get you to your goals.
Consistency can be a key to successful saving. Otherwise, it’s just too darn easy to let yourself off the hook from paycheck to paycheck, month to month and year to year. But that doesn’t mean your savings plan has to feel like a forced march.
Flexibility is also important.
A savings plan that seems smart and doable today may feel like torture six months from now. Or you might get a raise and decide your plan is actually far too easy and you could be socking away much more.
You might wreck your car. Get married. Have a baby. Get sick. Get fired. Or get hired for your dream job and have to move to Dubai.
Life changes. So it makes sense to tighten and lighten your budget — and the savings aspect you build into that budget — as necessary. If you’re tracking your expenses regularly, you may be better able to gauge how you’re doing — good or bad — and do something about it more quickly.
Anything is better than nothing
The good news is the tools that savers and investors use keep improving. Don’t be afraid to dream big but save small.
Maybe 20% of your income for savings is implausible right now, but any amount is better than nothing. You can still set goals and commit to getting there on a timeline that suits your needs. Developing a habit of saving can be a goal in itself.
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