How much to save is such an important question and it can vary quite a bit depending on your age and goals. Nonetheless, there are some rules of thumb that many professionals recommend. This month we’ll take a look at some of them.
A widely accepted strategy is the 50/30/20 rule. It simply states that we use 50% of our gross income for essential living expenses, 30% for discretionary expenses and 20% for saving. (Percentages rather than dollar amounts allow this approach to work for all income levels.) Gross income is the total amount of money you earn before any deductions or taxes are taken out — that’s your annual salary if you are a salaried employee. Essential living expenses are the basic, non-negotiable costs you incur to maintain a stable, healthy lifestyle. These cover the essentials you need for day-to-day life and typically include: housing, utilities, groceries and household supplies, transportation, healthcare, insurance, debt payments and childcare. Discretionary expenses are the non-essential costs that support your lifestyle, hobbies and enjoyment. These expenses are typically flexible and can be adjusted based on your budget. Here are some common discretionary expenses: dining out and entertainment, hobbies and recreation, travel and vacations, shopping for clothing and so forth, personal care and gifts and special occasions. Now, let’s look a little more closely at saving.
With a target of 20%, you may wonder what kinds of savings this is meant to cover. In short, it covers all savings. A common rule of thumb is that 10-15% is reserved for retirement and the remaining 5-10% is allocated for a new home, college expenses, an emergency fund, a rainy-day fund and so forth.
With this income allocation plan in mind, here are a few of the time-tested principles of saving.
- Start now. No matter how much you’re able to put aside for savings, starting now is way better than waiting until you can chip in a certain percentage.
- Automate savings. It works so much better to have a portion of your paycheck automatically deposited into a savings account. (Or maybe several accounts – retirement, college, etc.)
- Prioritize retirement. You’ll need a lot of money for retirement and time (compounding) is your friend. You can take out loans and find other ways to help pay for other items, but other than Social Security (and maybe a pension), you alone must save for your retirement. Starting younger (in your twenties) is always helpful, but it’s quite important that you begin no later than 40. (You can, and should, start even if you’re older, but you’ll face certain challenges such as larger savings requirements.)
With these guidelines in mind, you may wonder about the details of a personalized savings plan for your family. It might be helpful to see some of the articles I’ve previously written on this topic. In addition, we can discuss a solid plan for you, or discuss any other financial questions, in a no-charge, no-obligation initial meeting. Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.