Whether you’re several years into a steady job, just out of college, or in the process of creating your own path, the question remains: how much money should I save?
While we’ve interviewed some experts to help answer this question, we also dived into the basics of figuring out your own savings goals. That way, you can create a custom plan that will fit your own financial and lifestyle needs.
To understand exactly how much you should be saving, start with these five questions.
1. Are you a spender or a saver?
This is a question that ultimately requires you to be honest with yourself.
If you’re a natural-born saver then you’ll have an easier time when it comes to saving money for future goals. However, if you’re a spender by nature then you’ll have a bit more of a struggle.
Neither type of money personality is necessarily good or bad. It’s just important to know which one you are so you can successfully handle it.
I’m not a very good saver, and I enjoy buying things that I deem valuable. This means I’m a bit more of a spender than a saver. Since I’m not automatically inclined to saving money, I have to put barriers in place to create savings habits for me.
One way I accomplish this is by opening new savings accounts for each goal, such as car repairs, Christmas gifts, or travel funds. Then I set up automatic transfers of small amounts of money to those bank accounts every week.
Colin Ashby, a millennial financial writer from RebelWithaPlan agrees with my method.
“The important thing about saving is to start somewhere and to automate,” Ashby explains. “Ideally, you should be saving 20 percent with 10 percent going to retirement and 10 percent going to other savings goals.”
“But if you can’t save a certain percentage of your income, focus on the amount you can save and make periodic increases from there,” adds Ashby. He’s currently putting away 30 percent of income towards savings goals.
Whatever type of money personality you are, whether that’s a saver or spender, will help you accurately determine how much of your income you should be saving.
2. What are your savings goals?
The amount of money you should be saving every month also depend on your savings goals.
What big life events are you hoping to achieve? How far into the future are these goals? These are the goals you want to stash away extra money for, even when you lose motivation to do so.
Doing the math, whether it’s saving for a 5-year or 10-year goal, will help you reach your savings goal amount in a timely fashion.
For example, if you want to save up for a down payment on a house, you’ll need at least 20 percent of the home price. If houses in your area go for an average of $250,000, this means you’ll need to save $50,000.
Depending on your income, it could take you anywhere from five to 10 years or more to save up the entire amount.
Jon Dulin from MoneySmartGuides has been a personal finance blogger for six years and financial services professional for a decade. He advises “recent college grads to save 20 percent of their income.”
“It should be easy to keep living like a college student so your costs are low when first starting out,” says Dulin. “Plus, the sooner you get accustomed to saving 20 percent, the easier it will be to handle when a mortgage payment and as kids come into the mix.”
Dulin’s currently saving between 40-45 percent of his income each year. He and his wife make it a point to save first and live on what is left over. Their ultimate goal is to be financially free by the time they turn 55.
Knowing your savings goals is an essential part of figuring out how much money you need to save to reach them. Be clear about exactly how much money you should save so you can direct your money wherever you want it to go.
3. What can you afford to save?
Another important component of saving money is understanding how your budget fits into the equation. More specifically, what bills do you have to pay and how much debt do you owe? Paying off bills and debt can greatly influence your progress towards saving money.
That’s why you should make additional payments towards your debt whenever you can, even if it’s just $20 or $30 extra. Or, find ways to reduce your lifestyle needs and research alternative companies who might offer the same services for lower prices.
Ultimately, no matter how much or how little you can afford to save, make it a priority. John Rampton, a serial entrepreneur and founder of free digital wallet Due, is currently saving 40 percent of his income. He advises college students to start saving 10 percent.
“The more you save early, the better it will be longer term for you to live the type of life you want,” Rampton says. “Have it automatically taken out so that you don’t have to think about it. Then lock yourself out of the money so that you can’t touch it — cause we’ll always find an excuse to do so.”
4. Are you committed to begin saving today?
Above all else, creating a savings habit means getting started today. That means you need to get your budget used to saving money from the beginning.
It takes my budget a good 90 days or so to recover from a financial emergency or a change in the way I budget. It’s likely that your budget will take a few months to get used to saving a portion of your income too. So time is of the essence.
Larry Ludwig, Editor-in-Chief, and founder of Investor Junkie suggests that as a recent college grad you should aim to save 15-20 percent of your income.
“The younger you are the more time you have to invest, so it’s important to start early,” Ludwig explains. “The magic of compounding interest makes it easier as you get older.”
Compounding interest is interest calculated on the principal, plus any accumulated funds. In other words, you could earn interest on the interest in your savings or retirement account.
What’s more, the longer you have to let those funds accumulate, the less you’ll have to save yourself. In this case, time is on your side.
5. Are your savings goals long term or short term?
The question of how much income to save also goes hand-in-hand with where to actually put your money.
Funds that you need access to on a regular basis, or for short-term goals, can be stashed in traditional savings accounts or money market funds. These accounts usually don’t charge any fees to open and will reward you a very small percentage of interest.
A long-term place to put your savings is a tax-advantaged account, such as a Roth IRA. One of the benefits of a Roth IRA is that you can withdraw up to $10,000 completely penalty-free to put towards the purchase of your first home.
Michael Mezheritskiy, President of the Milestone Asset Management Group, tells recent college grads to “set up a retirement account immediately. An Individual Retirement Account or 401k is ultra important to start saving as this will be a significant part of your income later in life.”
How much money should I save?
The general consensus among financial experts is to save anywhere from 10-20 percent of your income as a new college grad. Of course, if you can save more then do so. But the 10 percent mark is a good start.
At the end of the day, you should start where you are and save a percentage of your income based on whether or not you’re a spender or saver.
That’s the most important takeaway. Then, continue increasing your savings with time. Start small and let time be your best friend.
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