You’ve started examining your finances and are ready to budget accordingly, but the idea of saving seems a bit daunting. Saving for personal reasons and for retirement is incredibly important, but you work hard for your money and want to be able to spend it how you please.
Maybe you already are saving, but it’s just not adding up the way you want. Or you save a little bit here and there, but it’s not consistent and you usually end up having to use it anyway. You think, “Where am I going wrong?” Here’s a look at how to set up a stable savings contribution, bulk up your retirement fund, and still have money for all the luxuries you’d like to afford.
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How Much of My Income Should I Save?
Keep reading to find out more about retirement savings; first, it’s important to talk about how much of your base income you should be stashing away in your savings account. It is advisable to save as much as you possibly can, without making your financial situation too tight. You should be able to treat yourself to a night on the town or a vacation every once in a while. Yet, if you have some disposable income, you should be saving most of it.
Design your own savings plan that works for you and your goals. Some experts suggest that you save as much as 30% of your paycheck, which isn’t a bad idea, but not everyone can afford that much.
For example, if you make around $3,500 per month and you’d like to save 20%, you’d need to set aside $700 per month. If you get paid twice per month that would be $350 per paycheck, which doesn’t sound too bad, but this does mean that you’re looking at $2,800 split between two paychecks instead of $3,500.
Saving on a Tight Budget
If you have a tighter budget and feel 20% is just too much, 10 to 15% is just fine. Looking at the example above, if you choose to save 10% you’d be looking at saving $350 per month, which equates to only $175 per paycheck (if you get paid bi-weekly). You’d still have $3,150 per month to spend on bills. At that rate, you’d have $4,200 saved in a year.
Any amount that you can add to savings is significant, so don’t be too upset if you’re not quite where you want to be just yet. However, if you think you can comfortably put more into your savings, then you should.
As a rule of thumb, it’s a good idea to try and save enough to make yourself comfortable if you lose your job for any reason. You need enough to get through a few months of job searching, given your current expenses. What’s more, it’s always a good idea to save a little bit extra in case of emergencies and have a “fun money” fund. Your main savings account should be the focus, but over time it’s worth it to add a few dollars here and there to an emergency fund and your monthly fun money allowance.
How Much Should I Save for Retirement?
First and foremost, if you aren’t sure that you’re taking advantage of your maximum 401(k) or retirement benefits, you need to re-evaluate your contributions. Oftentimes, people sign up for a 401(k) because their employer automatically sets it up or they do it simply because they know that saving for retirement is a good thing.
As you get a little bit closer to retirement, 401(k) contributions undoubtedly become more important. What if you’re starting to look at those numbers and are realizing they’re not where you want them to be? Or you just want to get a head start so you don’t have to panic about it later.
In the beginning, you’re usually set up with a pretty low amount, unless you dictate otherwise. This means that about 2 or 3% of your income may be going towards your retirement plan, but you could be taking advantage of more. There’s nothing wrong with 2 or 3% (something is better than nothing). However, usually, you don’t even notice that your income is any different. If this is the case for you, why not bump up your 401(k)?
Many employers also offer an “employer match” contribution, which is essential to take advantage of. If you really want to bulk up your retirement account, you should at least be taking the full employer match. For example, if you are making 2%t contributions and your employer will match your contributions up to 5%, you should increase your percentage to five. Your employer is offering you double what you’re already putting into the account. You’re turning down free money if you choose not to maximize this contribution.
For example, imagine your annual income is about $40,000. If your personal contribution to your 401(k) is 5%, you’ll be investing $2,000 per year. However, if your employer also matches your contribution up to 5%, you’ll be investing $4,000 every year.
The closer you get to retirement, the more you can usually contribute to your retirement savings. So, even if your employer stops their match at 5%, that doesn’t mean you have to stop there. If you’re allowed, try bumping yours up a bit higher.
As another example in the same scenario, if you personally contribute 10% of your income and your employer matches your contribution up to 5%, you’re walking away with $6,000 in investments per year. If you stay with that employer for 10 years, you’ve got $60,000 earning you dividends for retirement.
Cutting Unnecessary Expenses
It’s silly to let small expenses get in the way of the amount of money you could be saving. Even the fees from automatic bill pay may not be worth the convenience. Although it may feel much easier to set up your payments to charge in advance, you’re really paying heaps of cash each year, just to have the luxury of forgetting about your payments.
To maintain a hands-on approach to your income and ultimately your savings account, it may be helpful to cancel your automatic payments. Realistically, many people could easily be throwing away $360 or more per year just in fees.
In addition, it’s imperative that you take a detailed look at exactly what you’re spending your money on. Small subscriptions and treats that charge to your account monthly are easy to dismiss or they may fly under the radar altogether. That’s why everyone should know and understand each charge that comes through their account. If you’re not sure what it is or if you use it, it’s time to figure out how to get rid of it.
What Luxuries Can I Afford?
There’s nothing wrong with allowing yourself a few luxuries of your choice each month. However, if your finances are starting to feel out of control and your savings account is suffering as a result, now is the time to make a change and start saving the way you want to. A good first step is working those luxuries of your choice into your monthly budget, that way you can prepare for them and it won’t throw off your plan for potential savings.
In conclusion, at the end of the day, your savings account should work for you. You control your finances, not the other way around. You should be able to save for the things that are important to your life and your financial goals. It doesn’t matter if you start out small. Saving even a little bit means you’re still working towards something. Don’t get too down on yourself if you fall down and have to get back up again. All of us have been there. Just know that if you stick to it, you can have everything within your financial power.
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