How much money should you put away each month into your savings account? This question can be answered in a variety of different ways. The quick answer is that you should put away no less than twenty percent of each paycheck that you receive. At the very least, ten to fifteen percent of that sum ought to be contributed to the retirement accounts you maintain. The remaining 5 to 10 percent of it ought to be used toward paying off debt, establishing alternative long-term savings strategies, and putting together an emergency fund, all at the same time. Even while that is an excellent guideline to follow, it is not the sole solution to the problem. Continue reading for a more in-depth response if that's what you're after.
Your Targets on the Financial Front
Examining your long-term objectives is the best place to begin when attempting to determine how much money you should put away each month. To provide you with a general idea, your monetary objectives can be divided into the following three categories:- Expenses that will be due in a period of time less than one year from now
- Expenses that are expected to be incurred in the next few years or so.
- Very long-term costs that are at least ten years distant from being incurred
Financial Objectives for the Near Term
In a period of time that is less than a year, you will have expenses such as going on a trip to the beach, purchasing presents for the holidays, ensuring that you have the funds on hand to pay your taxes, and keeping savings for an upcoming birthday party. One other illustration of a short-term financial objective is to put away enough money in an emergency fund to cover costs for the next six months. It would take you less than a year to complete this task. In order to reach your goal of saving $5,000 in nine months, you will need to set aside $555 every single month toward this objective.Financial Objectives for the Long Term
Include expenses such as updating your appliances, making major repairs to your home, acquiring a new automobile (preferably by paying cash for it), or making a down payment on a property under the heading "less than a decade."Financial Objectives That Extend Far Into the Future
Buying a second house or amassing a sizable savings account for your children's college education are both examples of ambitions that fall under the "more than a decade" category of aspirations. Obviously, you shouldn't leave out the most important target for your long-term savings: your retirement.Make a list, formulate a plan, then do the math
Since we have previously discussed retirement, you may put that out of your mind for the time being because it will not be relevant. Include everything else on the list of things you're already saving for, such as weddings, house repairs, holidays, travel, and college funds, if you haven't already done so. Now, put down both your ideal savings goal and the deadline you have set for yourself. Carry out this step for each and every objective that you have listed. After that, divide the total length of time you have available by the amount of money you need to accomplish each objective. For illustration's sake, let's suppose you want to save up $10,000 for a wedding and you're hoping to tie the knot within the next two years. In order to attain your goal of $10,000 within the next 24 months, you will need to set aside an amount equal to $416 each and every month. Perform this computation for each objective that you have listed. You'll probably come to the conclusion that you can't put away enough money by the time you're done. To tell you the truth, the very first time I tried out this strategy, I ended up with savings objectives that were greater than my salary.What to Do When Your Objectives for Savings Are Greater Than Your Current Income
What options do you have when a situation like this arises? To begin, you need to adjust or eliminate some of your goals. Is there a vehicle that costs less than you could buy? Have a wedding with fewer guests and at a lower cost? Buy a house that is less expensive, which will require a smaller initial deposit on your part? Next, investigate ways in which you might reduce the money you are now spending. You may be able to save an additional $50 to $60 a month by canceling your cable TV service, money that you can then put toward one of your numerous savings objectives. The next step is to determine whether any of your objectives may have their deadlines pushed back. Do you absolutely need to replace your home appliances in the kitchen this year, or can you make do with the ones you already have for a few more years? Last but not least, consider ways in which you might increase your income, such as taking up freelance work on the side. In a nutshell, there are two different approaches to answering the question, "How much money should I be saving?" If you want an answer that is particular and personalized to your needs, you will need to spend at least half an hour writing down your objectives and thinking about the kinds of expensive things you plan to buy in the near future. Make sure that you are putting away at least 20 percent of your salary if you want a quick and dirty rule of thumb solution.Questions That Are Typically Asked (FAQs)
Why should one make an effort to save money?
Even if you don't have a particular objective in mind, putting money away in savings will provide you with financial security. Having funds set aside lowers the likelihood that an unforeseen expense would start a downward spiral of increasing debt.Which of these methods of savings provides the least access to your money?
Among the several types of savings vehicles, retirement accounts are among the least liquid. Although it is technically possible to make money out of a retirement account, doing so will result in significant and costly penalty fees. Because they are timed deposits, certificates of deposit, often known as CDs, are illiquid investments. You can take money out of a certificate of deposit (CD) early, just like you can take money out of a retirement account, but doing so will probably result in penalty penalties.