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)
- Here’s a pretty good article about how to save for retirement from Monster.com – they have more than just postings? Who knew ?
[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?
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