Most people know that it's important to save money during your working years in order to have a source of funds during retirement, but it's not always clear just how much you should save. Between retirement and investment accounts, emergency and vacation funds, and saving for purchases like a new car or home, it can feel like saving enough will cut too deeply into your income and leave you with nothing left over. With the right strategy, however, you can enjoy a comfortable lifestyle while still saving enough to make sure your needs will be met will into the future. Read on to learn more about the most important tips on how much to save each month.
Start With 50/30/20
As a basic starting point, Money Under 30 recommends using the 50/30/20 rule said to have been popularized by Elizabeth Warren. The rule calls for budgeting 50 percent of your income for essentials like rent payments and groceries, 30 percent for disposable income like spending on entertainment and hobbies, and putting the remaining 20 percent towards savings in some form. While it's not always possible to stick to this guideline depending on your personal financial situation, but it's a great rule of thumb to strive for when thinking about your personal budget.
Save Beyond Retirement Accounts
If you have a retirement account you contribute to regularly, you've already got your head in the game. The Balance reminds us, however, that retirement accounts can't be accessed before you turn 59 without a tax penalty. Retirement savings also can't be easily accessed for emergency expenses or to pursue medium-term financial goals, so it's vital to have a savings strategy outside of what's already contributed towards retirement.
Define Short- and Long-Term Goals
Striking the right balance between saving for short and long term goals is key to a balanced financial life. Long term goals should receive small, consistent contributions each month - these goals have the longest to mature and can build equity slowly over time, especially if the account earns annual interest. Short term goals like taking a vacation or buying a new car can get a larger share of what you set aside for saving each month, since you want to reach these more quickly and start enjoying them! The Balance even recommends using some of your disposable income to put towards these savings goals, and to never use long term savings to make short term purchases, which can seriously damage the growth potential of your nest egg over the long run.
Keep an Eye on Retirement Savings
Ally Bank takes a note from the St. Louis Federal Reserve and provides a helpful guideline for retirement savings at different milestones of your working life. A household earning the median US income of about $59,000 per year should aim to have about the equivalent of one year's earnings saved by the time the head of house is 30, or about $59,000. Each decade after should increase the multiple on earnings by two, so at 40 your goal should be retirement savings of about $177,000, and by 60 a healthy retirement account should hold over $413,000.
Don't Forget About Education
Many parents want to make sure their children have the option of pursuing a higher education once they finish high school. The expense for college in the US has grown significantly in the past 20 years and shows no signs of slowing down. Money Crashers recommends that once you are able to consistently put away enough to satisfy retirement savings, additional savings should be directed to a 529 savings plan or other financial vehicle that will give you a tax advantage while you save.
Saving can seem like an afterthought, but putting money away each month for the future has never been more important. Use these tips to get a handle on how much you should save each month and watch your nest egg grow alongside your peace of mind.