Everyone knows saving money is important. But, how much should you be saving? Well, that depends. How much you should be saving depends on what your goals are. Saving just for saving’s sake will not only be difficult to stick to, but not knowing what you’re saving for makes it impossible to know how much you need. So, first things first; set a few goals.
- First, set a short-term savings goal or two. Short-term goals are something you want to complete within a year. For example, paying for a nice vacation, your property taxes or a new television are all good short-term goals. Figure out exactly how much you’ll need and by when.
- Next, identify a mid-range goal. This is a goal that you plan to reach within 10 years. Things like purchasing major appliances, a new roof, a car, or a down payment on a home are good mid-range goals. Again, jot down approximately how much you think you’ll need.
- Finally, identify your lifetime goals. For most people, this is saving for retirement.
So, how much should you save? It’s easiest to look at this by goal.
You should save 10 – 15 percent of your income for retirement. Be sure to take advantage of your employer’s 401k, if offered, as well as any employer match. This will help you reach 10-15 percent more quickly. Also, whether you’re using your employer’s 401k, an IRA or another savings vehicle, make the contribution automatic. You are much more likely to stick to it when the contributions are automated.
Many people ask – but how much should I have in my nest egg now? Is it enough? In 2012 Fidelity Investments put together an age-based savings guideline, as reported in Time Magazine, which suggests
- At age 35, you should have saved an amount equal to your annual salary.
- At age 45, you should have saved three times your annual salary.
- At 55, you should have five times your salary.
- When you retire at age 67, you should have eight times your annual pay.
In general, using the 10-15 percent rule should get you to these milestones.
You should establish an “emergency fund” that can cover 3-9 months of your living expenses.
How can you save such a large sum? First, calculate your monthly cost-of-living. Assume that if you lose your job, you’ll sacrifice luxuries such as eating out or your premium cable TV package. How much do you really need to survive? Divide that number in half. Can you save this monthly? If so, you’ll build a six-month emergency fund within the next year.
#3: Everything Else
Make a list of the short-term and mid-range goal items from above. If it’s easier, or you’re not sure about mid-range goals, you can list broad categories like “home repairs,” “holidays” and “vehicle expense.”
Write down each savings goal and deadline. Divide by the number of months remaining to see how much you should save. Want to pay cash for a $15,000 car in five years? You’ll need $250 per month.
When you run through this exercise, you’ll probably discover that you can’t save enough for every goal on your list. You have four options:
- Re-think your goals
- Lengthen your timeline
- Cut your current spending so you can allocate more to saving
- Earn more
Most people opt for a combination of those four choices. You might decide you’d be happy buying a $10,000 car, which will require only $167 per month. You cut your $50 cable bill and pick up a babysitting gig one night per month, and voila – now you’re on-track to pay cash for your next car.
In general, most experts advise that at least 20 percent of your income should go towards savings. More is fine; less is not ideal.
At least 20 percent of your income should go towards savings.
Meanwhile, another 50 percent (maximum) should go towards necessities, while 30 percent goes towards discretionary items. This is called the 50/30/20 rule of thumb.
What are your tips for spending less so you can save more?