How Much Money Should I Be Saving Each Month?

One question that often pops up on The Simple Dollar is the
seemingly simple question of how much a person should be saving
each month. People often want to hear a specific percentage or a
specific dollar amount so that they have a benchmark or recipe to
follow.

The easy answer to this question is as much as
possible
. The more you save for the future, the easier
whatever it is that the future holds for you will be.

Tying that down to specific numbers is hard, but let’s give it
a shot, shall we?

An Emergency Fund

The number one most essential thing I would encourage most
people to do in terms of saving for the future is to have an
emergency fund. An emergency fund is simply a wad of cash sitting
in a savings account (which is about the most secure place for it,
plus it earns a little bit of interest) that you can draw upon in
case of personal emergency. If your car breaks down, you hit the
emergency fund. If you have an identity theft issue, hit the
emergency fund. If you have to fly halfway across the country to
visit a dying relative, you hit the emergency fund. You get the
idea.

Some people use credit cards as their “emergency fund.” I
advise against that, for a few reasons. One, a credit card will
fail you in some emergencies. It won’t help if you’re the
victim of fraud or identity theft. It won’t help you if your
wallet is stolen. It won’t help you if you hit your credit limit.
It won’t help you if there’s a disaster.

Many people recommend having a specific amount in their
emergency fund – say, a month’s worth of living expenses. I
don’t suggest that, at least not any more.
I think that
simply sets the destination, and what’s more important here is
the journey. What are you saving out of each paycheck?

Rather, I encourage people to set up an automatic
transfer for their emergency fund savings and never turn it
off.
Most banks can set up a regular automatic transfer
from a checking account to a savings account; many can do it right
from their online banking service.

Simply set up an automatic transfer that happens about two or
three days after your paycheck is normally received, and have it
transfer 3% of your normal paycheck to a savings account for
emergencies.

If you get paid $1,000 every two weeks, set up a $30 transfer to
savings every two weeks, or a $15 transfer to savings every week if
that works better for you. If you get paid $600 every week, set up
a $18 transfer to savings every week.

And never turn it off.

Instead, just leave that savings account completely alone and
tap it only for emergencies. Tap it when your car doesn’t start.
Tap it when you need to fly home. Tap it when you lose your job and
need to find a new one (turn off that automatic transfer until you
have a fresh new paycheck coming in, of course, then turn it back
on).

High Interest Debt Repayment

The next thing I would encourage people to address with their
savings is their high interest debts. By this, I’m not talking
about student loans, home mortgages, or car loans (most of the
time). Rather, I’m talking about things like credit cards and (I
really hope you don’t have any of these) payday loans. If
you have a debt that’s charging you 10% interest or more, your
top priority should be to eliminate that debt as fast as you
can.
That should trump other savings goals for the moment
beyond an emergency fund.

If you need a specific number to aim for, I would aim
for making a double payment on your highest interest loan.

Whichever debt you have that has the highest interest rate, make a
double payment on that each month. Whatever you owe, pay twice
that, while also making minimum payments on your other debts.

At the same time, you should try to find other ways to reduce
the interest rate on high interest debts you have. You can look for
low or 0% interest balance transfers for your credit card. You can
seek out personal loans from a credit union, particularly if you
have collateral you can use. You can directly call the lender and
see if you can get the rate reduced.

This should be your next goal after starting your emergency fund
savings. This should trump other savings goals.

Retirement Savings

If you have no high interest debt, the next most important goal
is retirement savings. You absolutely need to be saving for
retirement unless you want to be in old age and scraping by on a
meager Social Security check. Even if you have children who might
be going to college, this should still be a higher savings priority
for you so that you don’t run the risk of becoming a financial
burden on them in your old age.

You should be aiming to save 15% of your annual salary toward
retirement. That seems like a high number – and it is. For many
Americans, saving for retirement will gobble up most of the money
they’re wanting to save for the future.

The first place you should look for saving that money is your
workplace 401(k), 403(b), TSP, or similar plan. If you’re unsure,
ask your boss or the human resources office. What they’ll do is
set things up so that money is deducted directly from your paycheck
before you even receive it and put straight into your plan. If
you’re confused by the investment options, just choose a Target
Retirement Fund with a year close to when you’re between 65 and
70 years old.

Ideally, you’re going to choose to put in 15% of your pay. If
your employer offers matching, you can subtract the amount they
match from that 15%. If you can’t quite make it to that
threshold, that’s okay, but you should come back later and try to
bump it up to that level. It’s worth noting that 401(k)
contributions are pre-tax, which means that the money is taken out
before taxes are calculated. This means that you’ll pay less
taxes now and thus if you contribute 15%, your paycheck won’t go
down by 15% (it’ll go down a little less than that). However, you
will have to pay taxes on that money in your 401(k) when you retire
and start withdrawing it to live on.

If you don’t have access to a 401(k) or similar plan at work,
you can still save for retirement with tax advantages by opening a
Roth IRA for yourself. A Roth IRA is kind of like a 401(k) but
it’s independent of your employer, you put in money out of your
checking account instead of directly from your paycheck (but you
can automate this), and when you take money out when you’re
retired, all of it is tax free.

The key is to try to save 15% of your paycheck in a retirement
account of some kind. Aim for 15%. If you can’t do that right
now, contribute as much as you possibly think you can, then revisit
that decision in a few months and see if you can bump it up a
little.

Define Your Own Goal

If you are saving 3% of your income for emergencies, have no
high interest debt, and are saving 15% of your income for
retirement, you’re in really good shape. Right there, you’re
ahead of at least 80% of American households, and if you’re
looking to save more, you have a lot of options that depend heavily
on what your personal goals are.

Some people aim to pay off all debt. This minimizes their
monthly bills and makes it easier to save more or to make lifestyle
choices like changing jobs or careers. Usually, this is done by
making the largest payment possible each month on whatever debt has
the highest interest rate.

Others might start saving for a specific goal, like replacing a
car or buying a house. In those cases, you’re essentially
preparing in advance to avoid debt, with the interest from your
savings helping a little. Having a good down payment on any debt
will significantly reduce the interest rate on the debt and the
size of the debt, which means much smaller payments and/or a
smaller length of debt. Ideally, you can reach a point where
you’re always saving for a car and just withdraw money when
it’s time to replace a car without using loans at all.

Some people might choose to save for their child’s college
expenses using a 529 college savings account. Such an account lets
you invest money so that it grows rapidly and, if you use that
money for educational expenses, you don’t have to pay taxes on
all of those earnings. While this is nice, it should be a lower
priority for parents than an emergency fund, eliminating high
interest debt, and saving for retirement.

Final Thoughts

The key thing to note here is that “how much should I be
saving this month” is very much dependent on how much you’re
earning each month and your current financial situation. There is
no ready-made dollar amount that works for everyone – or even
works for any two people. However, the amounts above are good
starting guidelines that will help most people tremendously, no
matter what their life looks like specifically. An emergency fund
helps virtually everyone. Eliminating high interest debt helps
virtually everyone. Saving for retirement helps virtually everyone.
If you have those things checked off, you’re in good shape and
ahead of most Americans and you have some leeway as to what to do
next.

Good luck!

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How Much Money Should I Be Saving Each Month?
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Source: FS – All-News2-Economy
How Much Money Should I Be Saving Each Month?