You may have read an article or two lately about the Financial Independence, Retire Early — or FIRE — movement, in which people save 50% or more of their income and retire by age 40. And in a perfect world, this financial strategy might work.
Unfortunately, the reality is that most Americans can’t save 50% of their income, and many can’t set aside 20% or even 10%. Ultimately, there is no flat savings goal that works for every person. But, how much of your paycheck should you save? Here’s a look at some of the potential answers to this question, along with suggestions on how you can reach your savings goals.
- What Percentage of Your Income Should You Save?
- How Much Should You Save Every Month?
- Where Should You Put Your Savings?
- What Should I Do If I Have Trouble Saving?
- How Much Does the Average Person Have in Savings?
The slightly tongue-in-cheek answer to the question of how much you should save is “as much as you can.” The truth remains, however, that the more you can save, the more money you’ll have for your retirement or other savings goals.
As for what is a traditional, recommended amount to save, most experts suggest putting 20% of your paycheck toward your total savings. This includes your retirement savings, short-term savings and any other savings goals you may have.
Other experts recommend visualizing this savings goal by using a 50/30/20 model, in which 50% of your income is used for necessities, 30% is used for discretionary items and the balance — 20% — goes toward savings. Although 20% is a good goal to shoot for, even targeting 10% can be a good start.
Straight From the Experts: Weighing In on the 50/30/20 Spending Rule
Here’s an example of how much you should save if you’re following the 50/30/20 model. Let’s say you earn $50,000 per year after taxes. Based on the model, you should aim to save $10,000 per year. That translates to $833 per month out of your $4,167 monthly income.
If you can’t save that much right away, don’t let it stop you from beginning the process. Some savers find it easier to begin by saving a more modest amount, such as 1% or 2% of their income, and gradually increasing that amount over time.
In small increments, you might find it easier to increase your savings rate over time. For example, if you begin by saving 1% a month and pledge to increase that amount by 1% every subsequent month, you’ll be saving 12% of your income within a single year — and potentially as much as 24% within two years.
Most experts suggest that you keep your savings in different buckets based on your goals. First and foremost should be your emergency fund, which should be in the safest investments possible. For this bucket, consider U.S. Treasury bills and bank savings accounts.
Other short-term goals, such as buying a home or going on vacation, should also be kept in safe, liquid investments. Certificates of deposit can also be an option, just bear in mind that you may be penalized for early withdrawal, so you’ll still want to keep at least a portion of your savings in investments that are even more liquid.
Longer-term savings goals, such as retirement or your children’s education, can be invested more aggressively, as you’ll have more time to ride out the ups and downs of the securities markets. But there’s no blanket investment recommendation that would apply to all situations. You should contact a financial advis0r for help with the asset allocation for all of your savings goals.
Check Out: 39 Ways To Save for Your Emergency Fund
It’s always easier to save if you have a plan. If your plan is to save the money that’s left over after you pay all your expenses, however, you might find that you never have enough to save. Try turning that script on its head by paying yourself first every month. If the first dollars you receive go into your savings, you can learn to live on the remaining funds.
One way to help with this process is to automate your savings. If money gets taken from your paycheck before you even see it, it’s easier to manage. Talk to your employer about 401(k) deductions. You can also set up automatic transfers from your paycheck into your personal savings account at your bank or financial institution.
Another way to help with your savings is to create a budget. By seeing where your money comes and goes every month, it can be easier to stop overspending. Trimming your nonessential spending is a good way to help boost your savings.
If you need outside motivation, consider joining an investment club or make an investment pact with a friend. For some savers, working with partners who hold them accountable for making regular contributions is a good way to keep their savings on track.
The average amount that a person has in savings tends to vary by their age, education and income level. On average, Americans have more savings in their 50s than they did in their 40s, 30s or 20s.
This age discrepancy can be seen in the average 401(k) balance at Fidelity Investments. According to Fidelity, in the first quarter of 2019, millennials had average 401(k) balances of $129,800. However, Gen Xers had average 401(k) balances of $268,900, while boomers’ accounts reached $357,200 on average.
Demographic segments also play a huge role in determining the average amount of savings. For example, according to the Transamerica Center for Retirement Savings, the estimated median savings across all retirement accounts is $50,000. Workers with an annual household income of at least $100,000 have saved an estimated $222,000. Those earning less than $50,000, however, have median estimated savings of just $3,000. The disparity exists between college graduates and nongraduates as well, with a median estimated savings of $160,000 and $23,000, respectively.
Click through to read about 25 ways to save 20% more of your paycheck without even trying.
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