Most financial experts recommend building an emergency fund that could cover several months’ worth of expenses in the event you lose your job. But once you’ve done this, what should you save for next?
Since you’re already in the habit of saving, you now have the power to achieve other financial goals. Let’s look at…
Most financial experts recommend living off a certain percentage of your income and saving the rest. What percentage? The exact number varies from expert to expert.
“I like to advise clients to follow the 60% rule,” said Magdalena Johndrow, a financial expert who specializes in helping millennials invest at Johndrow Wealth Management. “Keep your expected monthly living expenses to 60% of your income and place the remaining 40% into four savings buckets.”
As for what to do after your emergency fund, Johndrow recommended grouping your subsequent savings goals into short-term, long-term, retirement and fun categories.
The exact percentage you’re able to save might vary. If saving 40% of your income is impossible on your current salary, start with a number that makes more sense for your budget today.
Hopefully, your earnings will eventually increase thanks to a promotion, a new job or extra side hustle money. Whenever you earn a pay raise, revisit how much of your income you’re able to save.
No matter how much you’re able to save each month, the concept is the same. After you’ve set aside a portion of your budget for living expenses, here are a few savings goals to work toward:
Earmark a portion of your savings for short-term goals. What you classify as short-term goals will depend on where you expect life to take you in the next five years.
Maybe you want to take a big trip around the world, buy a house, save for a wedding or make a cross-country move. Whatever your goal, the money in your short-term savings “should remain uninvested or invested very conservatively, depending on your personal risk tolerance,” said Johndrow.
Investing your money always carries some risk. If the market dips, your savings will lose value. You can afford to be more aggressive with long-term investments because you have time to let the market rebound if it takes a tumble.
For short-term savings, however, you don’t have that luxury. An online savings account or certificate of deposit is a safer way to stash savings you’ll need soon.
After an emergency fund, what’s next includes thinking about your expenses in the next decade. They could include anything from an investment property to a new car or even capital to start a business.
For these types of savings, consider an investment account. “Investing long-term savings is important given inflation,” said Johndrow.
Inflation refers to the increase in the cost of goods and the decrease in the purchasing power of your dollar. Investing your long-term savings offers the opportunity to yield greater returns and help your money retain its worth.
“You should want any long-term savings to grow at a rate outpacing inflation in order to retain the purchasing power of your dollar for future purchases,” Johndrow said.
There are many different long-term investment strategies you can use, but the important thing is to pick one and stick with it.
Your retirement fund is not the same as your long-term investment fund.
For long-term savings, you need to choose investments that allow you to withdraw money at any time without penalty. Retirement saving accounts, such as a 401(k) or IRA, come with special tax advantages — but they also charge fees or tax penalties if you withdraw before you reach a certain age.
When you’re deciding how much to save in this bucket, your first priority should be maxing out your employer’s 401(k) match if your job offers this benefit. If you have additional money to save, Johndrow advised putting at least 10% of your total income toward retirement savings.
If you don’t have a retirement savings account yet, it’s time to create a retirement savings plan you feel comfortable sticking to.
Not all your savings goals have to be serious — don’t forget to budget for a little fun. This savings category can be used for things such as concert tickets, a short weekend trip or new hobbies you want to pursue.
By creating a special savings category just for fun, you’ll be less tempted to dip into your other savings when an impulse purchase happens.
If you’re not sure how much money you want to commit to your “fun fund,” consider saving incremental amounts using an app. Apps such as Digit will automatically put aside a few dollars of your money every day, so you’ll have savings waiting for you when you need them.
When thinking about what to do after you’ve saved your emergency fund, it’s tempting to splurge — but the best time to start moving toward the goals above is right now. Saving is a habit and a lifestyle choice; if you start now, you’ll be that much closer to making the big purchases you’ve been dreaming of.
Besides saving your money, you could also focus on paying down debt. Target high-interest debt, such as credit card debt, first before moving on to low-interest debt, such as student loans.
If you need some assistance managing your budget as you work toward these goals, these expense tracker apps will help.
Rebecca Safier contributed to this report.
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