We all know the importance of saving money. But more often than not, it’s easier said than done.
Saving money is a huge struggle for most people.
Do you want to retire young? Travel the world? Start a business?
Maybe you’d eventually like to get married, buy a house, and go on that dream vacation. Or perhaps you’d just like to stop living paycheck to paycheck.
Having a reason to start saving, or a goal in mind, will help you stay on track and focused.
Whatever your reason is, it’s important to start saving as early as possible. If you haven’t started yet, don’t fret.
We’ll give you the tools you need so you can determine how much of your paycheck should you save and how you can allocate that money towards your goals.
- Why You Should Save Money
- Why Is An Emergency Fund Important?
- How Much Should Be In Your Emergency Fund?
- Setting Your Goals
- Do You Have Short Term Goals?
- What Are Long Term Goals?
- What About Lifetime Goals?
- Why Save For Retirement?
- How Much Should You Save For Retirement?
- How Much of Your Paycheck Should You Save?
- The 50/30/20 Rule
- The 50/30/20 Rule Infographic
Why You Should Save Money
There could be a million different reasons why you might want to start saving money. But, we can group these reasons into four main categories.
You’ll be saving for:
- Short Term Goals
- Long Term Goals
It’s great to have goals and want to save up so you can splurge on that luxurious trip around Europe. But, goals like this come secondary to having an emergency fund set up.
No matter what your goals are, you need to have a solid emergency fund in place before you start saving for anything else.
Why Is An Emergency Fund Important?
Emergencies are unpredictable.
You have absolutely no control over them to prevent one in the first place. That’s why it’s so important to have an emergency fund set aside before you start saving for anything else.
If you don’t build an emergency fund, any substantial amount of money you have put aside can be completely wiped out by an unexpected event.
Car accidents, medical emergencies, a job loss, etc all fall under this umbrella. These are all things we’ll never be able to see coming, but we need to be prepared in case they do.
Any unexpected situation has the ability to catch you by surprise. This could be devastating for you and your family’s daily life and cash flow.
If you’re not prepared for the emergency expense, it can derail your financial stability. You need to take these things into account ahead of time.
How Much Should Be In Your Emergency Fund?
You should have several months of expenses tucked away in your emergency fund for a rainy day.
The recommended amount is about 3-9 months worth of your living expenses.
By doing this, you won’t need to worry about putting you or your family’s goals at risk with any unexpected event that comes your way.
Once you have created a dedicated emergency fund, you can start thinking about how to allocate the rest of your money towards your other goals.
Setting Your Goals
We all have different goals we’d like to accomplish. Some are more rigorous than others, but at the end of the day, everyone has goals they’ve set for themselves.
Setting goals is important because we feel accomplished and satisfied by completing them.
But, not all goals are created equal. So, let’s break our goals down into a few categories.
You will have:
- Short Term Goals
- Long Term Goals
- Lifetime Goals
Do You Have Short Term Goals?
Short term goals are ones you aim to achieve within a year. They should be something you want and should be able to accomplish in the near future.
Here are some examples of short term goals:
- A vacation
- Down payment for a car
- Minor home improvements
- Purchase of new household furniture
- Paying your taxes
Do you know what your short term goals are?
If you do, go ahead and write them down.
What Are Long Term Goals?
Long term goals are ones you aim to achieve within the next 2 to 10 years. These tend to take longer to complete because they involve more of a financial commitment and self discipline.
Long term goals can be overwhelming, but they are achievable if you are committed.
Here are some examples of long term goals:
- Down payment on a home
- Starting a business
- College funds
- Paying off mortgage
- Around the world trip
- Major home improvements
Take a minute to think about all of your long term goals. Once you have formulated a list in your head, write them down on a piece of paper.
What About Lifetime Goals?
Saving for retirement is an example of a lifetime goal. This is what we all want to achieve sooner or later.
But how much you save now will play a big part in when you can retire, and how much you’ll have to support yourself for the remainder of your life.
Why Save For Retirement?
Very simply put, retirement is your only opportunity to live a comfortable life after so many years of hard work.
You need to save for retirement to ensure that you’ll have the money you need to take care of yourself once you’re done working.
By starting to save for your retirement now, you’ll be less stressed later on. So do the hard work now, and your future self will thank you.
After all, you don’t want to turn 65 and realize you have to keep working. Not because you want to, but because you won’t be able to support yourself otherwise.
No one wants to spend their retirement stressed out. It’s there to spend quality time with your loved ones and enjoy life.
So do the legwork now so you’ll be able to enjoy yourself later on.
A lot of people are under the impression that they can rely solely on social security as a retirement plan. But, doing this isn’t going to cut it.
It’s likely that we’ll start seeing less and less in terms of social security benefits each year.
So what happens if we outlive our social security? We’ll be on the line for all of our needs and have no way to get by.
The best thing you can do is take action for yourself. Create your own retirement plan and do not rely on social security or the government to take care of you.
How Much Should You Save For Retirement?
Honestly, you should save as much as you can. The more you can save now, the better of a position you’ll be in later.
It’s recommended that you save 10-15% of your current income for the future.
This may seem like a huge chunk out of your check, but there are ways to make it a bit less difficult.
A lot of employers will match part or all of your contribution if you’re placing the money in your 401k. Seize this opportunity and use it to build your savings up.
By taking advantage of your 401k, you’ll put up less money on the front end, but end up saving more in the long run.
Let’s say your employer matches your contribution, up to 50%. If you are able to put aside 10% of your paycheck, your employer will supply you with the remaining 5%.
Because of this, you’re now on the right track to save 15% of your paycheck. Yet, it’s not all coming out of your pocket.
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How Much Of Your Paycheck Should You Save?
So we know that 10-15% of your paycheck should go into your savings for retirement. But what about saving for your other goals? And spending money on necessities?
You need an easy way to break your budget down and allocate your money towards different things.
We like to live by the 50/30/20 rule.
So, how does it work?
The 50/30/20 Rule
The 50/30/20 rule gets its name from the way it suggests you break down your budget.
Essentially, you’ll be dividing your income into 3 different categories, spending 50%, 30%, and 20% on each portion.
50% Towards Necessities
50% of your budget is going to go towards necessities. This will include anything you need to pay for on a monthly basis in order to survive. So what falls into this category?
- Health Insurance
- Auto Insurance
- Car Payment
- Loan Payments
30% Towards Wants
30% of your budget is going to go towards your wants. These are things that are not considered a basic need to survive. So what falls under this category?
- Dinner Out
- Salon Visits
- Night Out With Friends
Don’t forget to think back to your short and long term goals when considering what to include in this portion of your budget.
You might want to include some of your short and long term goals in this category. After all, your short and long term goals are most likely things you want, not necessarily need.
A lot of people get tripped up when it comes down to differentiating between necessities and wants.
You may believe that something is essential, but the reality might be that you can live without it.
Which category would you put these in?
- Gym membership
- High speed internet
At the end of the day, these are all wants. You might consider them necessities, but the truth is you can live without these things. That makes them a want over a necessity.
It’s important to categorize everything correctly, so you can be sure you’re distributing your money to the right places.
— Get Out of Debt (@getoutofdebtcom) April 17, 2018
20% Towards Savings
20% of your budget is going to go towards savings. This will include saving for retirement, building an emergency fund, and paying off debt.
First things first, don’t forget to set up your emergency fund before you do anything else.
Remember back to how we said your emergency fund should be enough to cover 3-9 months of living expenses?
Well, your living expenses are your necessities. So, look back at the list of necessities, and determine how much you’ll need for a proper emergency fund.
Next, you’ll want verify your employer’s contribution to towards your 401k and retirement plan. Work it out so that 10-15% of your total paycheck will be set aside for your retirement savings.
Don’t forget that this doesn’t have to be 10-15% out of your own pocket. Use your employer match on your 401k to your advantage as much as you can.
Once you’ve set up your emergency fund and retirement savings, it’s time to pay off some debt.
Use the rest of the money that you’ve been able to save to pay off things like credit cards, personal loans, student loans, or anything else that’s costing you on a monthly basis.
Once you divide and conquer your budget with the 50/30/20 rule, you’ll be surprised at how much you’re able to save.
Make sure you put it to good use and set yourself up for the future as much as possible.
We all sit there thinking that we don’t have enough money to live our lives.
But, usually the reality is that we do. We just don’t take the time necessary to create a budget and make the appropriate adjustments to our lives.
Set aside the time to sit down and create a budget for yourself. Using the 50/30/20 rule will help you determine how much of your paycheck should you save for your emergency fund, retirement, etc.
Plus, it’ll appropriately allocate the rest of your money between your wants and necessities. At the end of the day, necessities come first and learning to differentiate between the two is essential to creating a balanced budget.
How much of your paycheck do you put away every week? Let us know in the comments!