No matter how much money you earn, it's important to set aside some of it for savings and investments to help you attain financial security. That’s an easy concept to grasp. The harder part is trying to decide how much income you should put aside. A lot depends on your circumstances. When you gather enough information, you’ll have a better idea and can implement your financial plan.
Determine Your Goals
Jot down the reasons you have for saving your money, such as buying a car or home, building an emergency fund, financing someone's education or building a retirement fund. List your most pressing goals first and how many years you have to meet your goals. Go to an online calculator to help with the process. These are available at Investor.gov and other websites and can help you list and prioritize your reasons for saving and investing.
When it comes to retirement savings, many people tout the 10 percent rule: save 10 percent of your income for retirement. The problem is, this is not based on any economic truth, according to Walter Updegrave, senior editor at “Money Magazine." Saving 10 percent is better than doing nothing, but it’s no plan. You need to consider what age you are starting to save for retirement, what age you plan to retire, and how much you earn on your investments. Unless you start early, like around age 25, the 10 percent rule won't provide enough savings. If you are older than 25, you should try to save closer to 15 percent of your income.
It’s difficult to give people a blanket percentage of how much income they should save or invest because everyone's situation is different. But there are some tools you can use, such as online savings calculators, that can help you come up with a plan. For example, say you are 30, make $100,000 a year, and have $50,000 in savings. According to CNNMoney's savings calculator, you should save 13 percent of your annual income each year, or $13,000, if you want to retire at 65. You should crunch your numbers at least once a year to ensure you are keeping pace with the amount you should save and invest.
Credit Card Debt and Beyond
If you carry credit card debt, pay it off before committing yourself to a long-term savings and investment plan. The amount you spend paying the interest on your credit card each month is likely more than what you’re making on savings or investments. You are better off paying off the debt first before you start saving. When your cards are paid off, put about six months worth of income into a savings account that you can tap into for an emergency. Gail Cunningham of the National Foundation for Credit Counseling suggests you save 10 percent of each paycheck until you have enough saved up. After that, spread your money between different investments, such as stocks, bonds and mutual funds, to help minimize your exposure to any one investment vehicle. Scott Pape of the Barefoot Investor recommends a 60-20-20 formula: 60 percent on necessities to live, 20 percent for saving and investing, and 20 percent for stuff you want.
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