Posted: April 17th, 2008 | Author: Joe | Filed under: Saving | No Comments »
I see a lot of people ask, “How much money should I save each month?”
This is an important question, but it is only half of the question. The other half is, “What are you saving for?”
The amount you should save depends on your financial goals as well as your personal situation. You will need to save a lot more for retirement than you will for your emergency savings, for instance.
Here are some common items people save for (or should save for), as well as some resources to help answer that all important question.
RETIREMENT
This is clearly something that everyone who is not currently retired should be saving for. This is also the one thing that generates the most questions regarding “how much”. I think this is probably due to the large number of variables involved. For example, how much you should be saving for retirement each month depends on your current age, the amount you have saved already, length of time before you retire, and your income among other things. But it also depends on things that are much harder to pin-point, things like the rate of inflation between now and when you retire, and what the average rate of return will be during that time.
Perhaps the biggest mistake young people make is to think that they are too young to worry about retirement or can only save too little to make a difference, and so they don’t save anything at all. This is sadly ironic because the younger you are, the more time is on your side and the less you need to save compared to someone middle aged who is just starting to save. It’s all part of the miracle of compound interest.
Here are some retirement saving resources:
- Here’s a nice retirement calculator to help give you a ballpark idea of where you should be. (It’s important to note that this should serve as a means to get you started only… it is not a substitute for sound financial advice)
[UPDATE]: I’ve just come across a detailed post on saving for retirement (with some lively debate in the comments) at AllFinancialMatters.com that you may want to check out.
COLLEGE
Just about the only thing to keep pace with the cost of health care seems to be the cost of higher education. The days of a college education alone setting you apart in the workplace are running down fast. Your children and grandchildren are likely going to need a college education simply to stay above the poverty line by the time they enter the workforce. If you think that’s scary or pessimistic, just check out Federal Student Aid to Undergraduates Shows Slow Growth, While Published Tuition Prices Continue to Increase.
Financial aid will certainly play a part whether junior goes to a state or an ivy league college, but you will likely need to tap some other savings to fill the gap, or saddle him with student loans. The reality is that for most people it will be a mix of financial aid from the government, a loan from the bank of mom and dad and student loans. The objective in that case is to try and minimize the student loans part of the equation.
Here’s a pretty in-depth online calculator to help get an idea of what kinds of numbers you’ll be looking at for your individual situation. Once you get an idea of how much, you can head over here to learn more about how best to save for college.
EMERGENCY SAVINGS
Most financial experts recommend you save at least 3- 6 months of living expenses in a safe, high yield account like a savings account at an online bank, or certificate of deposit. I recommend ING Orange Savings for emergency savings. They aren’t the highest rate around, but they offer a fairly high rate and I sometimes wonder if the highest rates are really that safe. If interested, you can get an ING referral for $25 free when you open an account with at least $250- that’s an instant 10% return on your money! Well, enough of my shameless plugs…
Where was I? Oh yes, 3 – 6 months of living expenses.. well, I personally feel that 6 months of take-home pay helps me sleep better at night. I tend to be conservative with things like that and plan for the worst, but the main reason for this is that I am currently the sole income source for my family of 4 and things could turn pretty ugly pretty quickly if that income stream became interrupted and I didn’t have a safety cushion.
I know, this is not really surprising but this too depends on your individual situation. For example, a 23 year old just out of college will need less of cash cushion than a 30 something with a wife who is a stay-at-home mom and 2 kids to provide for. Self employed people should also bump up their savings to more than the standard 3 – 6 month recommendation, but this again depends on what their living expenses and income stream are like.
CONCLUSION
So those are the “big three” when it comes to saving. I hope you found this information beneficial, and I would like to leave you with this thought.
In the Automatic Millionaire, David Bach discusses his “pay yourself first” formula is as follows:
- If you strive to be DEAD BROKE: Then you should spend more than you earn
- If you strive to be POOR: Then you should spend everything you make, and always talk of saving “some day”
- If you strive to be MIDDLE CLASS: Then you should pay yourself 5 – 10% gross income
- If you strive to be UPPER MIDDLE CLASS: Then you should pay yourself 10 -15%
- If you strive to be RICH: Then you should pay yourself 15 – 20 %
- If you strive to be RICH ENOUGH TO RETIRE EARLY: Then you should pay yourself greater than 20%
Which road are you on?
.
Related Posts:
Posted: April 14th, 2008 | Author: Joe | Filed under: Saving, spending | Tags: Rant, Saving | 3 Comments »
My wife, two kids and I went to the in-laws for the weekend. Since the in-laws live about 2 hours away and the kids are 2 and 4, we make a stop at Dunkin Donuts part of the ritual. The kids like to munch on a bagel during the ride, and their dad usually needs the coffee to wake up. It’s an all around win for all parties involved.
There’s a Starbucks in town that’s on our way too, but I’m more of a Dunkin’ kind of guy. They’re cheaper and less pretentious than Starbucks, right? Well… maybe.
This past trip was a little different than our others because I had a coupon for a free medium coffee. I figured this would be a great little treat. Imagine my shock when I received the bill and it was still $9.65!
$9.65! They must not have accepted the coupon… no, let me see:
“1 Medium hazelnut coffee -$2.48″
Hmmm… well, then what went wrong?
On my way out to the car, I examined the receipt more closely and spied the problem immediately:
1 Hot chocolate : $2.48
1 bagel : $0.99
1 cream cheese : $1.40
1 bagel : $0.99
1 cream cheese : $1.40
1 bagel : $0.99
1 cream cheese : $1.40
That’s $4.20 in cream cheese alone!
And no, it wasn’t some extravagant form of cream cheese with flecks of gold embedded for some decadent thrill. This is Dunkin’s for crying out loud – it was PLAIN cream cheese!
Insane!
I’m not sure, but I think I could get about 30 oz. tub of cream cheese at a grocery store for that price!!
Next time, we’re bringing our own cream cheese and we’ll spread it in the car!
I guess I’m most upset with myself since I never noticed or even thought about it until this. I just assumed it was the coffee and hot chocolate that were so costly.
Let this be a lesson, cost conscious consumer – examine the bill closely to make sure you know what you’re paying for each item.
Related Posts:
Posted: April 9th, 2008 | Author: Joe | Filed under: Economy | Tags: Recession | 5 Comments »
Despite the fervent hopes of the media (and some politicians), it is still too soon to even know if the U.S. economy is in recession.
The latest GDP report from the Bureau of Economic Analysis, dated March 27th 2008, states:
“Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 0.6 percent in the fourth quarter of 2007, according to final estimates released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 4.9 percent.”
Did you catch that? 0.6% increase for Q4, 2007. While that is quite a big drop off from 4.9% increase in Q3 it still isn’t a recession.
A recession is technically defined as “two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).”
Still, that doesn’t stop the news media from trying everything to scare up a recession for months. Although the media typically employ various writing techniques to imply the desired outcome, such as peppering stories with emotionally charged terms like “recession fears”, “overwhelmingly likely” or “severe, prolonged recession” and even falling back on the time honored poll. Even Greenspan has to get in on the act.
I find this especially disgraceful. If anyone ought to know better and ought to understand the need to inform and educate people, rather than scare and panic people certainly it is the former chairman of the Federal Reserve. But alas, he seems too bent on book sales to do the right thing.
To be fair, I don’t think members of the media are doing this because they’re in the tank for Obama, or are anti-republican. It’s more insidious than that. Fear sells. The media long ago realized that they can panic people into staying glued to the headlines so they will have the latest information and all the “facts” to make smart decisions.
Still, that doesn’t change the data (courtesy of http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm):
So, here we are at 0.6%. Not pleasant, but not a recession. Am I splitting hairs? Possibly. But shouldn’t we demand our media and leaders split hairs in such situations? To have a media that is practically doing everything in its power to create and augment fear and panic over something that hasn’t yet happened is disgraceful.
The simple fact remains that we do not yet have the data to know if we are in a recession.
So where does that leave us? The same place we were when we started. The best approach to all this noise is to simply tune it out. Turn off the CNBC, CNN and broadcast nightly news. Properly diversify your investments and pay down your debts. Maintain an emergency fund, and sharpen your job skills.
Take this simple approach and you’ll be ready for whatever direction the economy rolls.
Related Posts:
Posted: April 4th, 2008 | Author: Joe | Filed under: Saving, Tips | Tags: Budgeting, money, Saving, spending, windfall | 3 Comments »
Reading Four Ways I Upgraded Out Of My Raises at Free From Broke, got me thinking about how our spending tends to grow into our income. I’ve known about that concept for a while now and have fought hard to resist it, but I’ve had a realization recently that makes this even easier. I’d like to share it with you, dear reader.
With all the talk about the economic stimulus payments that will be issued in the next few months, coupled with my own bonus and raise at work, I started to see things in a different light. Call it the reverse of the Pay Yourself First principal. The idea is a simple one – Spend no more than 15% of your windfall and save or invest the rest.
How It Works.
By spending 15%, you get the psychological effect of (short term) reward while still maintaining 85% of your found money to put to work in a high yield, online savings account or pay down debt or invest for the long haul (the REAL reward). It’s instant gratification AND long term reward – the best of both worlds.
The psychological factor is the key. I’ve been very disciplined in the past – I would jack up my automatic savings plan to match the amount of my raise, and I found is that this would work according to plan for a few pay periods. The problem for me was that it worked too well. The whole point was to act financially like I hadn’t gotten a raise and I’d be that much closer to my goals. The reality was that my financial self was more than happy, but the emotional (or human) side of me felt somewhat depressed that I hadn’t seen any of this supposed reward.
The Result Was Self-Sabotage.
I would over compensate by spending more. I spent less than my increase, but that amount would still be enough to cause a shortfall that would wreck all kinds of havoc on automatic money transfers and the like. In the worst case, it would cascade into a bank over draft fee at some point thus costing a lot more than the proposed 15%, and delaying the very financial goals that were supposed to have been reached quicker as a result of the raise!
You may think this 15% factor is not enough, or that you’d need to have a windfall of a couple hundred dollars at least, but that’s not really true. Sure, it’s a lot nicer when you’ve got a $1,200 stimulus check, but even small amounts work. For example, say you sold some “junk” you found in the closet on eBay or Amazon for $50. That 15% comes out to $7.50. Not much you say? Ah, but it’s still a cup of coffee and bagel on your way to work, or a discount CD, DVD or book. And the best part is you still have over $40 that you didn’t have before.
Related Posts:
What others are saying