According to a Federal Reserve survey, up to 46% of adults in the United States do not have an emergency fund of $400. While poverty and low income contribute to this alarming number, lousy spending and saving habits also play a role. We'll struggle to cover an emergency home or auto repair, unforeseen medical expenditures, or any other financial "surprises" if we don't save enough money in the short- or long-term. That is why saving money should be a top goal for everyone. You may believe you cannot afford it, but you cannot afford not to. Unlike previous generations, who could rely on pensions to fund their retirement, today's workers are primarily on their own. And while Social Security is still sustainable, I wouldn't expect to receive full benefits when you reach retirement age. Plus, we all need some cash on hand — cash to cover a car repair so you can go to and from work next week, cash to pay that medical bill so your daughter may have surgery, cash to pay for education, help pay for a wedding, and a variety of other financial obligations we all face.
How much money should you save aside for your long-term objectives?
But how much money should you put aside? Years ago, it was general knowledge that we should all save at least 10% of our earnings for retirement and the future. However, it is currently standard practice to save at least 15% of one's income, preferably more. As a financial advisor, I constantly advise my clients to put aside at least 20% to 25% of their income in retirement accounts and cash savings. Some may think that saving so much money is insane, but in my opinion, it is the only way to prepare oneself for the harsh realities of today's world. Who is saving for you and your future, if not you? Setting objectives and reviewing them frequently is by far the most effective approach to developing – and keeping to – long-term financial plans. I believe in setting financial objectives for the long term, three years, one year, and 90 days. Every quarter, I assess my 90-day goals to ensure that I am on track with my longer-term objectives. If you want to increase your savings rate, setting targets that you can "check-in with" is a good idea. If you're currently saving 10% of your income in retirement accounts and cash and want to increase it over time, aim for a 15% savings rate within 90 days. Within a year, aim for a 20 percent or 25% increase. A straightforward approach to achieve this is to gradually increase your employer-sponsored retirement account contributions over time, such as every 60 or 90 days. You may not even notice the additional percentage deducted from your paycheck, but those funds will mount up and significantly increase your wealth. You'll need to adopt a somewhat different approach when it comes to cash savings. Because it's so easy to lose track of money in your checking account, I usually recommend setting up automatic monthly withdrawals to a long-term savings account. Over time, you can expand your nest egg without being tempted to squander or waste your excess cash by paying yourself first and making it automatic.Financially Sound Long-Term Savings Plans
If you've been reading this blog for a while, you're well aware of the importance of retirement savings for your financial future. You'll have to work longer than you wish and struggle financially in old life if you don't have an adequately funded retirement plan. On the other hand, if you have enough money invested, you may be able to retire early, accomplish your life's "bucket list," and retire with less stress and more peace of mind. However, you'll require financial savings after retirement to meet all of life's demands - and expenses. Here are a few excellent long-term savings strategies that anyone may use:Plan #1 for Long-Term Savings: Pay Off Consumer Debt
While paying off your high-interest consumer loans isn't necessarily "saving," there are numerous advantages to doing so. While practically every debt you have should be eliminated, you should prioritize high-interest credit card debt and personal loans first, followed by car payments and educational loans. Bonus Tip: If you're having trouble paying off debt with a high-interest rate, consider zero percent balance transfer credit cards, which allow you to pay no interest for up to 21 months. Regardless matter whatever debts you need to pay off, doing so will make a significant difference in your finances. If you stop paying monthly loan payments, you will have more money to save and invest each month. You'll be able to develop your wealth at a far faster rate if you have more money to save and invest. You'll also dodge the main wealth-drainer on the table: credit card and debt interest payments.Build Your Emergency Fund (Long-Term Savings Plan #2)
Remember how nearly half of all Americans couldn't cover a $400 emergency? You don't want to end up in that situation, believe me. When you don't have enough money to meet an emergency, it's easy to fall behind on your other expenses or, worse, take on new debt. Having an emergency fund is the most excellent approach to prevent these issues altogether. Most financial gurus recommend having 3-6 months' worth of expenses on hand in case of an emergency, and I tend to agree. Make sure you include an emergency fund in your long-term savings strategy. To begin, calculate how much you need to save. Then figure out how much money you'll need to set aside each month. Finally, automate it and continue to save until you attain your goal. Assume that your monthly costs total $3,000 per month. You'd have to save $375 every month to save up for three months' worth of spending ($9,000) in the next 24 months. Whatever your objective is, getting started as soon as possible is the best approach to attain it. There are few tactics that can surpass having a fully stocked emergency fund when it comes to long-term savings goals.Plan #3 for Long-Term Savings: Save for a Home Down Payment
Saving for a down payment on your own home is another long-term savings strategy that can help you get ahead. This can benefit your finances in a variety of ways. First, putting down a substantial down payment on a home can help you borrow less money. You'll have a smaller monthly payment and pay less interest if you borrow less for your property. Second, saving at least 20% of the purchase price as a down payment will help you avoid paying expensive private mortgage insurance, or PMI. This "insurance coverage" can cost up to 1% of the value of your property per year, with no practical benefit to you. For instance, PMI on a $200,000 property might cost up to $2,000 per year or $166 per month. You can avoid PMI entirely by putting down at least 20% and instead save that money.Plan #4 for Long-Term Savings: Save for a Vehicle Upgrade
While you may already own a vehicle that you enjoy, we all know that it will not endure indefinitely. A "new car fund" is an additional option to explore if you're searching for another long-term saving plan to get enthusiastic about. By establishing this fund, you can save for the inevitable — the day your automobile breaks down or the expense of maintenance becomes unsustainable. If you have a car fund developing in the bank, you won't have to be concerned about replacing your vehicle with a new or used one. Aside from your new car fund, you might want to consider getting a rewards credit card to help you save even more. The GM BuyPower card is a clear example of a card that can be extremely useful in this regard. You'll earn 5% on your first $5,000 spent every year if you keep this credit card in your wallet. In addition, every purchase you make will earn you 2% back. Your points are redeemable for a new Chevrolet, Buick, GMC, or Cadillac vehicle, and they will never expire. More information on the GM BuyPower credit card may be found here.Plan #5 for Long-Term Savings: Save Even More for Retirement
If you put money into your company-sponsored or personal retirement accounts on a regular basis and still have money left over, you might choose to start a standard or Roth IRA. Contributions to a regular IRA are almost always tax-deductible. When you reach retirement age and start utilizing your account, you'll have to pay income taxes on your withdrawals. Contributions to a Roth IRA, on the other hand, are made using after-tax dollars today. On the other hand, your money will grow tax-free until you retire, and you won't have to pay income taxes on withdrawals when you reach the age of 59 1/2. You can also withdraw your Roth IRA contributions without penalty at any point before reaching retirement age. It's worth noting that I said contributions rather than earnings. You'll have to pay the penalty and taxes to remove your profits before reaching retirement age. In general, I believe that contributing to a Roth IRA is a good idea for anyone whose income enables it. After all, receiving tax-free income in retirement will almost certainly make you feel like a genius! Related:Where Should You Open a Roth IRA?
7 Things to Know About Roth IRA Regulations
Get your "Freedom Fund" in order with Long-Term Savings Plan #6
A "freedom fund" should be the next aim on your list if you have the rest of your long-term savings goals in order. While each person's fund will be different, it should be large enough to allow you to pursue whatever you choose with your life. Remember how I told you to make a list of your long-term objectives? Your freedom fund will enable you to attain whatever goals you set for yourself. You may utilize your freedom fund to start saving for whatever you want in life after your finances and savings objectives are in order and being entirely funded each month — whether it's the freedom to take a risk, the financial freedom to quit your work, or the freedom to take an incredible vacation. You are only limited by your aspirations and the amount of money you can save when it comes to your freedom fund!Last Thoughts
While deciding where to put your long-term savings can be difficult, there are numerous goals for which to save if you think about it. You'll be in the best position to pay an emergency bill, retire earlier, and live the life of your dreams if you have money in the bank to fund those aspirations. If you're having trouble deciding how to spend your long-term money, sit down and make a list of short- and long-term objectives. Once you've done that, the best financial strategy for you will almost certainly emerge on its own. Keep in mind that we're talking about your life and your money. Nothing is more important than your personal goals and dreams when it comes to how you should spend and save your money!