How Do I Maximize My Savings?
You’ve started examining your finances and are ready to budget accordingly, but the idea of saving seems a bit daunting. Most of us already know that saving for personal reasons and for retirement is incredibly important, but we all work hard for our money and want to be able to spend it how we please. Well, a healthy savings account should include all of those aspects. Saving for bills, large purchases, retirement, and emergencies is just as important as budgeting for your own spending money.
Maybe you already are saving, but it’s just not adding up the way that you want. Or you save a little bit here and a little bit there, but it’s not consistent and you usually end up having to use it anyway. You think, “where am I going wrong?”. Let’s take 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.
How Much of My Income Should I Save?
We’ll get into retirement savings a little bit later, but for now, let’s just talk about how much of your base income you should be stashing away in your savings account. Honestly, I suggest that you save as much as you possibly can, without making your financial situation too tight. I do think it’s important to save some wiggle room for yourself. You should be able to treat yourself to a night on the town or a vacation every once in awhile. So, keep that in mind. Yet, if you have some disposable income, you should be saving most of it.
You may have seen some standard savings plans online, which is great, but you should design your own plan that works for you and your goals. Some experts suggest that you save as much as twenty percent of your paycheck for your savings account, which isn’t a bad idea, but not all of us can afford that much.
Let’s look at an example: If you make around $3,500 per month and you’d like to save twenty percent, you’d need to set aside $700 per month for your savings account. 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. If you think this is doable for you, what are you waiting for?
For those of us that feel twenty percent is just too much, ten to fifteen percent is just fine. In that same example, if you chose to save ten percent 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. Don’t sell yourself short though, 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 should lose your job for any reason. Not for extravagant spending of course, but enough to get yourself 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 a “fun money” fund. Of course, your main savings account should be the focus, but over time I suggest adding a few dollars here and there to an emergency fund and your monthly allowance so that you can treat yourself.
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. Often times we sign up for a 401(k) benefit because our employer automatically sets it up for us or we do it simply because we know that saving for retirement is a good thing. As you get a little bit closer to retirement, those 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 two or three percent of your income may be going towards your retirement plan, but you could be taking advantage of more. There’s nothing wrong with two or three percent (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 savings?
Many employers also offer a “employee 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 potential for employee match. For example, if you are making two percent contributions and your employer will match your contributions up to five percent, you should increase your percentage to five as well. You employer is offering you double what you’re already putting into the savings account yourself. You’re turning down free money if you choose not to maximize this contribution.
Just to show you what a huge difference this can make, let’s say your annual income is at about $40,000. If your personal contribution to your 401(k) is five percent, you’ll be saving $2,000 per year. However, if your employer also matches your contribution up to five percent, you’ll be getting double that every year. In addition, 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 percent, doesn’t mean you have to stop there. If you’re allowed, try bumping yours up a bit higher. Another example in the same scenario, if you personally contribute ten percent of your income and your employer matches your contribution up to five percent, you’re walking away with $6,000 per year. If you stay with that employer for 10 years, you’ve got $60,000 saved for retirement.
What Luxuries Can I Afford?
It’s silly to let small expenses get in the way of the amount of money you could be saving. In another article we discussed why automatic bill pay could be hurting you — fees. 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. In order to maintain a hands on approach to your income and ultimately your savings account, I suggest that you stop the automatic bill pays altogether. Realistically, we figured out that many people could easily be throwing away $360 or more per year in just 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 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.
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 take back control over your finances and start saving the way that you want to. I suggest 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 your life and your financial goals. It doesn’t matter if you start out small. Saving even a little bit is 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.
Image source: https://pixabay.com/
Trisha is a writer and blogger from Boise, ID. She is a dedicated vegan, an avid gamer, cat lover, and amateur SFX artist.
This post was updated February 28, 2019. It was originally published July 9, 2017.