How Much Should You Save?

There is no right answer to this question. You should set up savings goals that meet your needs for the immediate future and long-term.   A common rule of thumb is to pay yourself 10% of what you earn. For instance, if you make $5000 a month you should be putting away $500 cash each month. If 10% is not currently attainable with your current budget, tuck away 5% until you can manage the full 10%. You can also make cuts to your regular spending to find extra cash each month that is better served in savings than going to your cable company. Don’t forget to throw in your loose change you have stored in jars and couch cushions around your home. It may be a few pennies now but you’ll be surprised at what it can be transformed into over time.

Where Should You Put It?

There are many places you can save your cash. An emergency fund is a good place to start, at least until you have 6-12 months of expenses in case you find yourself out of work. This fund can also be used to cover unexpected emergencies like car or home repairs. Set up side accounts to cover upcoming vacations or big-ticket purchases.  A traditional savings account at your bank or a money market mutual fund will both work just fine, but I prefer high yield online savings accounts.  High interest CD’s are another option.  Check bankrate.com and shop around for the best rates.

Once you have a decent emergency fund, you should seriously consider starting a Roth IRA or at least investing in your company’s 401k plan up to the company match.  Check out the Basics of Retirement Investing for more on securing your golden years.

Get Rich In Three Easy Steps

1. Spend less than you earn – Here’s a general rule of thumb on how much of your income to save depending on how early you start, not including your employer’s contributions: 
   • If you are 25 or younger, save 10% of your income every month  in your retirement accounts.
   • If you are between 25 and 35 years old, save 15% of your income every month.
   • If you are over 35 years old and still haven’t begun saving for retirement, you’ll need to save at least 20% of your income every month.
2.  Pay Yourself First By Investing Regularly – As you can see above, the earlier you start, the less of your income you’ll have to save.  Time is the single biggest asset of the young but unfortunately, it’s also the most wasted.  If you get into the habit of investing early and often, you may even find yourself in the enviable situation of being able to afford to cut back on your retirement contributions in your 40′s or 50′s without mortgaging your future.  The best way to pay yourself first is to sign up for your 401k plan at work and have the money deducted directly from your paycheck.  Not only will you get a tax break on your contributions, but you won’t even notice the money is gone since it’s taken out before it hits your bank account. 
3. Watch Your Expenses - Despite the common adage, you DON’T get what you pay for when it comes to investing.  Higher expenses do not translate into higher returns, nor does paying a professional money manager or financial planner.  What’s more, the power of compound interest works against with for expenses.  Every dollar taken out of your account to pay your mutual fund manager or planner is a dollar not compounding for you.  Invest your hard-earned investment dollars in low-cost Index or Target Retirement Funds in your 401k, 403b, or IRA account to minimize your expenses and get rich quicker.