How Much Should I be Saving and What Do I Do With It?

Most people have heard the advice “Save your money”  but no one really talks about what that means or how to do it.  No one really talks about what you are saving for, how much to save, or where to put those savings.  There is no single answer but there are a few simple things that can get you started on a savings plan that works for the life you want to live. 

If you are just starting out and don’t really know how much you need to save or do not have a baseline for your spending habits, a good recommendation is between 15 and 20% of your income.  You can also set a specific dollar amount to save if you prefer working with tangible amounts.  Just remember to increase this amount as your income increases.  Many employers offer the option or have a default contribution to save within retirement plans, so be sure to include this amount in your overall savings.  As you develop your own personal budget based on your life goals, you can adjust the amount you are saving and develop a plan for where to save that money.

So you’ve decided to become a saver, but where do you put the money you save?  This again is a deeply personal question that requires an examination of your life goals, but there are some simple guidelines that can get you started.

If you do not have one yet, developing an “emergency” fund that you use to help you from taking on debt when unplanned, large emergencies happen, is a great foundation to your money plan.  Starting with an emergency fund of $2000 to $3000 can help you avoid unnecessary debt if your car breaks down or some other large expense comes unexpectedly.  This money is designed to help in a situation where immediate money is needed and should be kept separate from your daily finances in an account you can access easily and quickly.  A high yield savings account is often a good place to keep this fund. You may hear others advising that you have 6 months of emergency fund, which can be good advice.  However, starting with a smaller fund can be less daunting and should be the first step for someone who is trying to develop a budget. You can always adjust your plan to add more to this account later.  

Once you have established an emergency fund, the next simple rule is to maximize your work retirement account match.  Talk to your HR department and find out exactly what your employer offers.  Many offer something along the lines of if you put 6% of your earnings into retirement they will match 3%.  This match is a sure 50% gain on your money from the first day it is vested.  This is part of your compensation package and if you do not take advantage of it you are leaving money on the table.  Where you put this money is limited by the options your employer offers and you should educate yourself on the best of these options. At the beginning, the most important thing is to make sure that you are investing it somewhere and getting that match.

Once you have an emergency fund and are collecting your employer match, you should explore a personal IRA to determine if that is the best fit for you.  Depending on your personal situation a Roth IRA that grows tax free and that you have access to the contributions at any time can be a smart decision.  Currently you can only invest up to $7000 per year in a personal IRA.  Investing that $7000 per year over the length of your career can lead to significant impact in your retirement years.  

Once you have maximized these three, the options open even more. There are HSA accounts, High yield savings accounts, brokerage accounts and insurance products.  All of these have their pros and cons and a way to fit into your money plan and you can work with a coach or advisor to determine which ones are right for you and which ones move you closer to living a life based on the things you value.  If you are looking for help understanding any of these options, coaches at Value Driven Finance are here to help!