The amount of money you should save depends largely on your income and financial needs. There really is no perfect answer to this question as there are so many unique details depending on your circumstances. For example, how much do you need to have in an emergency fund or how much do you need for retirement? Everyone is unique so its important to develop a plan based on your unique needs.
There are some suggested formulas and recommendations that can help. However, you should also consult a financial planner to help you decide they best ways to save your money. You may want to put your funds in an easy to access account or invest it for long-term gains.
How much should I save from each paycheck?
The rule of thumb is to start out by saving 10% of your pay every month to start out. Eventually you should be able to save 20% every month. That may seem like a lot. If you make $5000 a month you will want to save anywhere between $500 and $1000. In today’s economy, this could be difficult. If this is the case, you need save what you are comfortable with while working to lower your expenses.
Many financial planners recommend that you use the 50-20-30 plan. This allows 50% of your income to pay expenses. These are necessities such as rent and utilities. Food and gas would also fall into this category. 20% would be for savings leaving 30% of your income for wants. This would include bills that are not necessities, such as cell phones but also things like dining out.
How much do I need for an emergency fund?
While retirement savings are important, before you start a retirement fund you need a basic emergency fund. An emergency fund should contain at three to six months’ income. The exact amount you need, will depend on your family size and the amount of debt you have.
An emergency fund can help with sudden loss of income, medical expenses or home repairs. It will help prepare you for any unexpected expenses, without adding the stress of taking out a loan or running up credit cards.
How do I start an emergency fund?
To start an emergency fund, start small. Create a budget so you can see how much you can afford to add each month. Looking at the big picture can be overwhelming and seem impossible but even creating small goals such as a $1000 can really help get your fund started. In the beginning, this money should be kept in a savings account. This will allow you access quickly if needed but keeps it separated from your everyday funds. As your emergency fund grows, you may want to consider Certificates of Deposit (CD)’s or money market accounts.
It is important to keep this money separate from your everyday accounts to avoid temptation. However, you should not tie this money up in mutual funds or stocks. These types of accounts are not easily accessed in an emergency.
How much should I save for retirement?
How much you need for retirement is not a simple answer. There are many factors to consider. You will need to look what your needs will be and take into the account the age you would like to retire? While carefully looking at each aspect of retirement will help, you may still need to consult a professional financial planner. They can help you figure out how much you need to save and the best types of accounts to put your savings in.
The first thing to look at is what you think retirement will look like. Do you wish to maintain your current lifestyle or maybe even live a little better? Maybe you are willing to sacrifice some quality of life for an earlier retirement? The answer will determine the amount you will need to have in order to retire.
Your current income will help you calculate your future needs as well. No matter how you envision your retirement, it will stem from your current earnings. You know how much you need a year to live comfortably on now, so it is safe to plan to have at least that much a year for retirement.
The rule of thumb is to multiply how much you think you will need a year to live by 25. For example, if you plan on needing $50,000 a year to live, then you need to have $1,250,000 in savings to retire comfortably.
What age do you want to retire?
The age at which you plan to retire will also affect your savings’ needs. It’s simple, if you wish to retire at a younger age, you will need more money. The amount of your retirement years will be longer, so you will need to have more money saved to cover them. At the same time, if you wait longer to retire you will have fewer years to worry about. You will have more working years to save money towards your retirement.
Now that you have idea of what you will need to retire you need to look at what you already have saved. The more you have saved now, the less you need to save going forward. You can also look at how much you will receive from any pension plans or Social Security. You can subtract these amounts from your annual income requirement to get a better picture of how much to save.
Start Saving Now!
Your age is an important factor in saving for retirement. The older you are, the less time you have to save, so you will need to save higher portions of your income. If you are still young and are starting your retirement savings, then you will not need to put as much away every year, because your investments will have more time to grow.