How Much Should You Save Each Month?
How much should you save each month? The right answer depends on how much you earn, how much you spend, and what your financial goals are.
Saving money is relative. If you have credit card debt costing you a crushing 18 percent interest, putting $100 per month into a passbook savings account where you earn one percent (or less) on your money really means you’re spending even more – and you’re certainly not saving.
The more money you make, the more you should be able to save each month. But no matter how much you earn, the first step to saving money is to spend less – and that includes paying off your non-deductible debts (like credit cards, auto loans, student loans and personal loans) as quickly as possible.
Pay down your debt to save more each month.
Pre-paying your debt offers a guaranteed return, and it’s one of the reasons why you should pay down all of your non-deductible debt first. (A mortgage is deductible, if you itemize on your federal income tax return; a credit card debt is not deductible.)
Make a list of each non-deductible debt you have and how much you’re paying in interest on the debt. Organize these on your piece of paper so that the debt with the highest interest rate is at the top. While making at least the minimum payments on all of your debt, throw as much cash as possible toward the debt with the highest interest rate.
Once you pay that off, move onto the debt with the next highest interest rate. Throw as much as you can toward that debt – including the amount you’re no longer paying toward the debt you just paid off – and so on, until all of your debts are paid off.
The good news about paying off debt before it’s due is that you’re “earning” a rate of return on your cash equal to the interest rate the debt carries.
Here’s how it works: If your credit card carries an interest rate of 21 percent, every $1 you prepay on that loan effectively earns 21 percent thanks to the way interest is compounded.
Compounding will help you increase how much you save each month.
Once you pay off your debt and start saving money for your financial goals like buying a home or retiring, compounding will help you turn $5,000 a year into hundreds of thousands of dollars 30 years from now.
Compounding refers to the idea that you money grows faster the more you save. You earn a rate of return on all of the dollars you save, so as you add more to your savings, your savings compound exponentially.
How much should you save for your financial goals? How much should you save for retirement?
Some people never know what they’re saving for. If you don’t have a written list of financial goals, you should create one. Simply write down your short-term and long-term financial goals.
Short-term financial goals would be anything you hope to achieve in the next 5 to 10 years (or less), including buying a home, buying a car, paying for your own education and taking a fabulous vacation.
Long-term financial goals would including planning out your retirement, a longer-term vacation (perhaps a trip that lasts a month or two), paying for your children’s college tuition or graduate school, or buying a second home.
If you’re saving for your retirement, you should save as much as you can, experts say. Especially since the Social Security trust fund will likely run out of cash before you hit your retirement years. To balance the Social Security budget, retirement specialists say the government could delay full retirement benefits from 67 to 69, or reduce benefits based on how much money you earn.
Americans are saving more than they have in decades.
The recent housing and credit crisis have hit Americans hard. One result is that we’re spending a whole lot less. But we’re also saving a lot more money each month, anywhere from 4 to 6 percent of our income.
Considering that in 2005, Americans as a whole had a negative savings rate (that’s right – we were spending more than we earned, mostly by pulling equity out of our homes), this is a dramatic change. One recent survey showed that Americans will likely spend just 86 percent of what they spend before the housing and credit crisis. If that’s true, it could prolong the post-recession recovery.
How do we compare to other countries? Japanese typically save about 10 percent of their income. Because of the way the way compounding interest works, the average Japanese might retire with four or five times as much retirement savings as you have.
Which would you rather have: An extra $1,000 in your pocket today or an extra $20,000 when you retire?
Don’t compare how much you save with how much anyone else saves
It doesn’t really matter how much you save compared to, say, your neighbor, your cousin, your friend or your siblings. What really matters is how much you’re saving relative to the savings goals you’ve set for yourself. The Ivy League education you want for your children could cost as much as $90,000 a year by the time your toddler is ready to enroll.
But as the cost of that education or new car or trip around the world grows, so too will your savings; hopefully at a faster rate than both inflation and the rising cost of a college education (between 5 and 7.5 percent a year).
How much you save this month and next month (and every month until you retire) depends on what you want to purchase, and when you want to purchase it.
How Much Should You Save Step-By-Step Planner
How much should you save? This step-by-step planner should help. :
1. Pay off your debt. Start with the most costly debt you have with the highest interest rate and work your way through all your non-deductible debt. These days, the only debt that is deductible is the interest paid on a mortgage or home equity loan. Everything else should be paid off. You’ll never be able to truly save if you’re paying off debt.
2. Put cash aside into a liquid emergency cash fund. Experts recommend you have at least 6 months of living expenses in there just in case you get fired. These days, with unemployment reaching upwards of 10 percent, you may want to set aside even more. For high-income workers, it may take 2 years to find a job. Would you be able to survive in the meantime?
3. Make sure all of your insurance premiums are completely paid up. You don’t want to start looking for health insurance or life insurance in your late 40s or 50s. Make sure you stay up with your premiums. It could even be difficult to get a new homeowners’ insurance or auto insurance policy if you let yours lapse.
4. Start saving toward your financial goals. You don’t have to make much each year. You just have to spend less than you earn and invest it wisely. And if you’re lucky, you’ll wind up a multi-millionaire.
How Much Do You Need?
Economists look at everything in current dollar values. So if you’ll need the equivalent of $50,000 in income in today’s dollars when you retire in 35 years, plan on saving enough (or achieving a high enough rate of return) to have $3 million saved.
If your money earns 10 percent a year (a hefty clip equal to the average return of the stock market), you’ll need to save about $1,300 per month for 30 years. Most investors believe that the stock market won’t earn those kind of annual returns for some time. So you should plan to be able to save enough money even if you don’t get those stellar returns.
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