What a great question! Unless we really think about this and set up some concrete plans, we may delay a proper savings program causing us to have to save more later on or not be prepared for expenses as they pop up. In my experience over the years, I’ve seen that savings needs vary by age, income, current level of savings, etc. So every person’s specifics are different — a one-size-fits-all approach can be misleading. There’s also the need to enjoy life now as well as to prepare for the future.
Whew, that’s quite a bit to consider. Where to begin? As a starting point, many people turn to the 50/30/20 guideline. It simply says that you might consider using 50% of your take-home (after-tax) income for necessities (housing, food, insurance, utilities, transportation, etc.), 30% for wants (entertainment, dining out, travel, etc.) and 20% for savings and debt repayment (which is actually a form of saving).
You might be thinking there’s no way I can save 20% per month. Maybe that’s true, but the most important factors are to regularly save something and to start now. Okay, so whatever you are able to save, how might that be divided up among your various savings goals? Once again, that really depends on your situation, but something called the Hierarchy of Saving might help you think about this:
Build a starter emergency fund
Save enough to cover small unexpected expenses (often $1,000–$2,000 or one month of expenses).
Capture employer retirement match
If your employer offers a retirement plan match (like a 401(k)) — contribute enough to get the full match.
Pay off high-interest debt
Focus on credit cards and other high-interest debt before heavy investing.
Build a full emergency fund
Aim for 3–6 months of essential expenses (more if income is variable).
Maximize tax-advantaged savings
Retirement accounts such as 401(k) and IRA, Health Savings Accounts (HSA), etc.
Save for short- and medium-term goals
Home down payment, car replacement, travel, education costs, major purchases, etc.
Invest beyond retirement accounts
Taxable brokerage accounts for additional wealth building
There are a few tried-and-true methods for achieving your savings plan. To start, pay yourself first. That is, treat savings as you would your mortgage or any other must-pay expense. Next, automate it. If you never see the money, you’ll be much less likely to spend it on something else. And finally, if you come into additional funds (raise, inheritance, bonus, etc.), allocate as much as you can to savings.
That’s quite a bit to think about! We can help you tailor these decisions to the right approach for your family, or discuss any other financial matters, 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.