This is How Much Money You Should be Saving at Your Age
How much money should you be saving? Well, that depends.
There’s no one-size-fits-all answer when it comes to a specific amount. That number depends on a variety of factors such as your age, your income, where you live, how you live and your own personal financial goals.
If you envision a retirement full of jet-setting travel and fancy dinners, for example, you’ll need to save more than if you’re looking forward to spending your golden years in a rocking chair on the porch sipping lemonade.
While the specifics of everybody’s financial situation are different, however, there is a simple answer to the question of how much you should be saving:
As much as you can.
Again, that answer means different things for different people. If you’re in your 20s and saddled with student debt and a car payment, you might not be able to save as much as someone in the middle of their career.
But regardless of your current situation, and whatever your dreams for the future may be, there are a few money-saving habits that everyone should start. As much as you can, do these five things:
Manage your expenses. Many people spend most, if not all, of their income (and then some!). The only ways to save more money are to make more or spend less. Whatever your income, setting a realistic budget can keep your expenses on track so they don’t crowd out savings. Living on a budget doesn’t mean that you can never spend money. It just makes sure that saving money is a priority right alongside paying your phone bill and going out to eat.
Build up an emergency fund. It can be hard enough to stay on budget without having your entire plan blown apart by an expensive car repair or unexpected medical bill. Setting money aside in an emergency fund can cover those costs without depleting your normal monthly budget. Once you get your budget in place, put whatever money is leftover into a bank savings account until you have enough cash in there to foot the bill for any emergencies.
Actively reduce any high-interest debt. Not all debt is bad. A mortgage on a house can be a great way to build equity in real estate at a relatively low interest rate, for example. But carrying credit card debt at double-digit interest rates will limit your ability to put money into savings. And even if you do put some money away, the interest that you earn on your savings won’t keep pace with the interest you pay on debts that have high rates.
Participate in your employer’s retirement plan. Many employers will match the money you put into a 401(k) plan, up to a certain amount. That’s free money that you get to keep in your account even if you change jobs, and it can grow over time and reap the benefits of compound interest. If you don’t have a retirement plan through your workplace, you still can start saving by opening an Individual Retirement Account (IRA) that offers tax advantages.
Increase savings incrementally. Saving 10 percent of your income is a great savings target, but don’t panic if you can’t set that much aside in your budget initially. If you can only save 5 percent of your income, that’s a good start. Then, get used to living on that budget and try to bump your savings up to 6 percent next year, and up to 7 percent the year after that, and so on.
In addition to these things you should do, there’s one very important thing you should not do, says Jonathan Grocki, a financial advisor with Dart Investment Centers in Mason, Mich.
“Don’t do nothing at all and tell yourself that you’ll make up for it later,” he said. “Guess what? You won’t. I know there’s at least one person out there right now shaking their head and telling themselves that they are different. Don’t be that guy.
“Start saving now. Even if you’re only saving 1 percent of your income, you are developing good habits and strengthening financial muscles that you will need to use for the rest of your life.”
The magic of compound interest means that even little amounts saved regularly in your 20s and 30s often adds up to more than bigger amounts that you put off saving until your 40s and 50s.
As for the specifics of your personal financial situation, talk to a financial advisor to see how much you should be saving at age 20, 30, 40 or 50. Whatever the amount, your financial advisor can help you decide where to save money — whether it’s long-term savings for retirement and your kid’s college or short-term savings such as a bank savings account or Certificate of Deposit (CD) that grows your money and keeps it safe for a big purchase in the near future.