Everyone’s savings goals change as they progress through life. No matter how old you are or what your savings goals might be, one thing is always true – you are never too young or too old to save money.
Aiming for a specific savings target each month or each paycheck can be a great way to establish healthy financial habits.
Whether you are a recent graduate or well into your career, it is never too late to start saving part of your income. Saving for emergencies, retirement, education, and down payments are all valid reasons to want to establish a solid savings plan.
The question is – where do you start? How are you supposed to know how much you should put away from each paycheck? Furthermore, how do you prioritize your various savings goals?
While everyone’s financial situation is different, it is possible to establish some general guidelines on how much you should aim to save. Below, we discuss some useful strategies and take a look at some common savings goals.
Make Saving Your Routine
When it comes to saving, the most important piece of advice that experts agree on is to start saving immediately. It is quite easy to establish a habit and get yourself into a healthier financial position.
The easiest way to begin saving regularly is to arrange automatic payments from your checking account to your savings account. Automating the process takes the effort out of saving.
Experts often advise clients to set up automatic transfers so they happen as soon as your paycheck is deposited into your account. Not only does this eliminate the temptation to spend too much of your paycheck, but it also takes the guesswork out of the process. You will know exactly how much you are saving each month.
As you grow accustomed to the amount being subtracted from your paycheck and added to your savings, you can budget the remainder and make sure your financial house is completely in order.
Another bonus of an automatic savings routine is you can make sure your savings are being directed into a high-interest account. Collecting interest on your savings helps the total grow and helps you achieve your savings goals even faster.
Determining The Amount You Should Save
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Your first step when determining how much to save is to take a deep dive into your financial goals. For just about everyone, savings goals can be broken down into three categories:
- Expenses that are expected within less than a year.
- Expenses that are expected within less than a decade.
- Long-term expenses that are over a decade away.
Short-Term Savings Goals:
Short-term savings goals are generally classified as any expenses that are coming up within a year or less. These goals can be trivial, such as a vacation fund, holiday gift fund, or a new computer or they can be more serious, like a tax fund, elective medical procedure fund, or replacing an important appliance.
One of the most important short-term financial goals you should have is saving up an emergency fund. While this amount varies from person-to-person, most experts recommend you aim to save up an emergency fund that amounts to roughly six months worth of your take-home pay. Nobody knows when a crisis will strike so it is always a smart move to protect yourself.
While this number varies according to an individual’s pay and expenses, most experts recommend putting aside around $5,000. This might sound like a lofty savings goal but it is worth it for the sense of security it provides. If you could save just over $400 per month, you could have a $5,000 emergency fund within a year.
Long-Term Financial Goals:
Longer-term goals might seem less urgent but they are worth saving for now. If you are a parent, these savings goals could include building up a college fund. For others, you might want to look at saving up a down payment for a larger home or even a vacation home.
No matter what your long term savings goals are, the earlier you start, the less overwhelming these expenses are in the future. Again, automation is key. If you have a small amount of money automatically transferred to a high-interest savings account, you can ignore that fund and allow it to grow.
Far Off Savings Goals:
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For almost everyone, the most distant but most important savings goal is retirement. While it may seem a long way off, saving for retirement should begin as soon as you start generating an income.
There are many different opinions when it comes to determining the correct amount of money needed for retirement, but most experts agree that you should be saving at least 10% of your gross income.
Retirement savings are becoming more important than ever before. Increased life expectancies and uncertainties regarding social assistance programs mean you need to be prepared to look after yourself.
Adding even small amounts to a retirement fund can make a difference in the long run. Compounding interest rates can really help in this regard.
So, How Much of My Income Should I Save?
It might be frustrating to hear that there is no specific dollar amount that works for everyone. Your paycheck and your spending habits are different from everyone else’s.
That said, most experts agree that saving 20 percent of your gross income is a general rule of thumb. As discussed above, how you break that down into your various savings goals will differ. Taking half of that 20 percent and putting it towards your retirement fund is smart. A 10 percent retirement savings strategy adds up quickly. That leaves 5 percent for your long-term savings goals and another 5 percent for your short-term goals and emergency fund.
Do not get frustrated if you are struggling to meet these savings goals at first. After all, they are goals. The main thing is that you start saving now!
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