What Percentage of Money Should You Save Each Month?
Updated on Apr 16 2019
How much money should you and your family save each month? This is a frequently asked question with an individualized answer that is different for each person and each family. It is crucial to figure out how much money you should save each month to hit your financial goals - especially as retirement approaches.
Financial Trouble in Retirement
A report from Northwestern Mutual found that Americans have, on average, $84,821 saved for retirement - far from the recommended $1 million savings mark. Additionally, 21 percent of Americans confessed to having nothing saved for the future and another 10 percent said they had less than $5,000 saved.
Many Americans are having financial trouble in retirement, actually living below the poverty level largely because they failed to save enough during their working years. Knowing how much to set aside each month can help you confidently hit financial goals in retirement.
Creating Financial Goals
How much money you should save for retirement largely depends on your financial goals. The basic answer is that you should be setting aside 20 percent of your income each month towards savings. Of that 20 percent, 12 percent to 15 percent of that should go toward retirement funds and savings and 5 percent to 8 percent toward an emergency fund, other long-term financial goals, or paying down debt.
While that’s the basic answer most experts will give, every person’s financial planning situation is different and monthly savings will break down differently. To determine how much you should be setting aside consider your short-term, long-term, and future retirement goals.
Short-term financial goals These would include any expenses coming up within the next year like a family vacation, an expensive graduation gift, or building up an emergency savings fund.
Long-term financial goals These are expenses that you can anticipate having in the next decade. Examples of long-term financial goals would be putting a down payment on a house, purchasing a new car, or expensive home repairs.
Future financial goals Future financial goals are those expenses you anticipate having beyond the next decade such as a child’s college tuition or purchasing a second home. This would also include your retirement plan.
Calculating Your Monthly Savings
After you carefully think through each of your short-term, long-term, and future financial goals, consider how much you will need to fund each of your goals. Divide your remaining time in months by your goals and that’s how much you will need to set aside for each goal every month.
You may find that your goals exceed your income. If that’s the case, modify some of your goals or rethink them entirely. Maybe your brand new car becomes one that is slightly used. Your wedding becomes a little less expensive or instead of building a dream house, you decide to purchase a fixer-upper. Consider cutting current spending to increase savings or even delaying your goals to give you more time to save.
If you still can not reconcile financial goals and savings, connect with a fiduciary financial advisor who can give you an honest assessment of your finances and help you find ways to save and invest, making all those financial goals a reality.
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