From buying your first home to creating college funds for children, everyone has aspirations that depend mainly on their financial capacity. While borrowing is an option for many households, saving money keeps you debt-free and financially healthy. However, saving isn’t always as straightforward as it sounds. For example, setting aside $50 per month in a savings account with negligible interest might not be enough to get you to your goal. Your specific goals, time horizon and expenses will determine the percentage of income you save. Here’s a breakdown of how much to save, how to increase your savings and where the money should go.
A financial advisor could help you put a savings plan together for home buying, college planning, retirement and other financial milestones.
What Percent of Your Income Should Be Saved?
The percentage of income you should save depends on your financial goals. For example, retiring at ages 59 and 70 are situations with differing variables such as Social Security income and annual healthcare expenses. As a result, saving for something like retirement will require a specific percentage of your income based on your financial plan.
Additionally, you’ll want to consider your savings goals other than retirement. For example, you may have a short-term goal of a Cancun vacation you want to take next year. Since the average cost for a couple is just over $2,000 for a week’s vacation, you could set a goal of saving $167 per month for a year to afford it.
On the other hand, you might have long-term goals to save for as well. You might start a 529 plan for your child’s college tuition. If you start saving early, you’ll have well over a decade to stockpile the cash needed to pay for a four-year degree.
However, if you don’t have well-defined financial goals or are looking for a baseline savings figure, consider the 50/30/20 budget plan. It advises that you dedicate 50% of your post-tax income to necessities, 30% to recreational activities and luxuries and 20% to savings.
Socking away 20% of your income will allow you to build up an emergency fund and contribute to your retirement account. Plus, the plain percentage can help you keep the discipline needed to save consistently. Remember, if your employer has matching contributions to a 401(k), that counts – so if you contribute 4% of your paycheck to your retirement at work and your employer matches it, you’re already at 8%.
How to Increase Your Savings
If you’re struggling to put more away each month, here are three tips to help you grow your savings:
Make it automatic. Most banks let you automate deposits to your savings account. As a result, you can designate part of your paycheck or a set amount from your checking account toward your savings account each month. The benefit is twofold: you’ll never have to log into your bank account to move money into savings and you’ll adjust to the amount of money available in your checking while your savings account grows.
Leverage pay increases. Few things are as encouraging and rewarding as a raise at work. However, you can capitalize on this by putting some or all of it into your savings. This strategy can strengthen your savings and prevent you from blowing the bonus pay on treats. If your work gives raises every year, even better – you can plan to increase your savings contributions according to the schedule.
Trim the budget. Getting rid of unnecessary expenses can free up more of your budget for savings deposits. For example, you might start cooking at home instead of ordering out as much. Or, you could eliminate cable or other subscriptions to get closer to your savings goals.
Where to Save Your Money
Numerous account types can hold your savings. Like the percentage of income you save, the account you choose will depend on your savings goals. Here are eight accounts to consider when saving money:
Savings accounts. Your bank account likely has a savings component. If not, savings accounts are available at almost every bank and credit union. They differ from checking accounts because they are less accessible for spending and provide higher interest rates.
Savings accounts also come in the high-yield variety. You can find high-yield savings accounts at many financial institutions. They provide higher interest than standard savings accounts and limit access to funds to encourage saving. In addition, high-yield savings accounts have higher minimum requirements for first deposits than standard savings accounts. All savings accounts are FDIC-insured for up to $250,000.
Certificates of deposit. Certificates of Deposit (CDs) are bank products with higher interest rates than savings accounts. Unlike savings accounts, CDs have a maturation period, meaning they provide interest for a set amount of time before returning the money to you. More extended maturation periods usually mean higher returns.
For example, you might put $2,500 into a 5-year CD and earn 3.5% interest for the duration. When 5 years expire, you’ll get your money back plus interest and you’ll need to find another financial instrument to grow your money. If you decide to withdraw some or all of your money from the CD before it matures, you’ll lose most or all of your gains as a penalty.
Money market accounts. Money market accounts are a midpoint between high-yield savings accounts and CDs. They offer better interest rates than high-yield savings but keep your money more accessible than a CD. Money market accounts often require higher initial deposits than high-yield savings and you usually receive a debit card or checks you can use to spend the money if needed. Lastly, money market accounts are FDIC-insured.
Money market funds. A money market fund is a low-risk mutual fund that acts as a hybrid savings and investment account. Because it’s a mutual fund, interest rates are variable and you could even lose money in your account if the investments go south. However, the risks are significantly less than that of other investment accounts and earning potential is higher than other types of savings accounts.
U.S. notes and bills. Also known as treasuries, the U.S. federal government offers and guarantees the value of these financial instruments. Treasuries don’t incur local and state taxes. They provide short-term or long-term gains depending on the type. For example, treasury bills usually mature in a matter of weeks and pay an increased value compared to the original purchase price. Conversely, treasury notes mature after several years. You can start investing in treasuries at the $100 level.
Bonds. Bonds are assets with a maturity date and typically less risk. The private and public sectors both issue bonds to raise money for endeavors such as construction, business expansion and governmental programs. Purchasing a bond is like loaning your money for the project, for which you receive fixed interest until the bond matures.
Employer-sponsored retirement accounts. Your employer probably offers a retirement account, the most popular of which is a 401(k). However, if you work for a nonprofit or the government, you’ll have a 403(b) or 457(b), respectively.
Every employer-sponsored retirement account has specific allocation options, fund types and tax implications. However, the primary reason to contribute to the plan is if your employer matches your deposits. For example, your employer may match deposits of 5% of your paycheck. As a result, you can double your investment by contributing up to the match limit. Taking advantage of an employer match is an excellent way to maximize your savings.
Individual retirement accounts. Whether your employer matches contributions to a sponsored plan or not, an individual retirement account (IRA) is a solid option to build up an independent stream of income for retirement. You can pay taxes on your IRA funds now (with a Roth IRA) or later (with a traditional IRA), giving you flexibility in planning for the future. If you need to withdraw money before turning fifty-nine and a half, you’ll face steep financial penalties.
Saving money is a vital financial habit for every individual and couple working toward financial goals. Retirement, a new car and everything in between require a financial plan with savings as part of its structure. So, whether you follow the 50/30/20 rule for simplicity’s sake or get microscopic with your IRA contributions, taking control of your finances by intentionally putting money aside is crucial.
Tips on How to Save
A financial advisor can help you create a financial plan for your saving goals. SmartAsset’s free tool matches you with up to three financial advisors who serve your area and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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