How Much Should I Have Saved?

I get this question all the time! I think oftentimes, people are looking for some indication that they are on the right track. Good news! The fact that you’re asking is a sign that no matter where you are with your financial situation, you are ready to get to the next level.

There are a lot of different types of savings, but the most common accounts people should have are Emergency Fund, Retirement, and then Mid-Term goals such as saving for a home, kid’s college, vacations, new vehicles, or any other things that you anticipate coming in the next 10 years.

There’s no universal answer for how many dollars you should have in these accounts, but here are some factors so that you can determine your goals:

Emergency Fund:

Your very first savings goal should be a bare-minimum emergency fund. For many people this is between $500 and $2000.

This should be higher if:

• You have dependents
• You only have one source of income
• Your income source is volatile
• You own your home
• You expect car repairs
• You have a lot of high-interest debt

This can be lower if:

• You have multiple incomes
• You have no dependents
• Your job is very stable
• Your cost of living is generally quite low
• You have a worst-case-scenario plan to get rid of your expenses in the case of job loss, such as moving back home or relying on a roommate

Ultimately you will be building that emergency fund to the point where in the event that you lose your income, you will not have to change your lifestyle while you search for a new job, but that larger emergency fund can wait until after you’ve accomplished more pressing financial goals such as getting out of debt, especially anything that’s charging you more than about 7% in interest.

Retirement:

First thing’s first. What is your current retirement situation? Do you have a 401k or something similar? And most importantly: Are you taking full advantage of any available company match? If your company will match 5% of your income when you put it in, you MUST make that work in your budget, at the minimum. That 5% is FREE MONEY, and it is the only way you’ll ever get 100% return on investment.

Second, you’ll need to imagine what your retired life will look like and then assess how close you are to implementing your retirement strategy. Some questions to ask yourself are:

• How old are you now?
• At what age do you plan to retire?
• Do you own your home, or will you own it by then?
• What are your retirement accounts currently worth? How have they been growing?
• Do you expect to receive Social Security, Disability, or company pension?

These questions will help you determine what the possibilities are at your current savings rate, and if you feel you will be spending more in retirement, such as traveling, giving gifts, or buying the luxury car and boat that you’ve always wanted, you may need to adjust your savings habits. Most people conclude that an increase in retirement savings will make their future much more comfortable!

The more you save now, the less you spend on a regular basis, and therefore the less you will need to be comfortable in retirement. This brings you closer to financial independence and helps stave off the dreaded “lifestyle inflation” that can make your future plans seem all but impossible.

Mid-Term Goals:

Your mid-term goals are anything you would like to save up for within the next 10 years. This can be next years vacation, a home down payment in 5 years, a nice new car whenever the current one gives out, or something else.

In order to determine how much you should be saving, determine the cost of the event, the time period in which you will use the amount you saved, and then how many pay periods are between now and then. This will help you create a monthly savings goal that feels more realistic.

Examples:

Family Vacation in 12 months, $3000 total needed by December, That’s $250/month and if you get paid twice a month, that’s $125 per paycheck.

New car needed soon, plan for $6000 in 18 months. Save $333/month, or $166 every two weeks.

Home down payment in 7 years. Looking at $250k budget. 20% down payment would be $50,000. That’s $595/month for 7 years, or approx $300 every two weeks.

Outlining your goals like this will help you determine whether your goals are achievable on your current budget, or if you’ll need to find more money in your budget somehow, or adjust your expectations. This is the most FUN way to focus on changing your habits! Just imagine what you can accomplish when you break it down to such a small amount as a couple hundred dollars per month!

Now that you’ve set your goal, you can load these figures into your budget and make sure your spending reflects your goals. If you are not currently able to make the required payments to reach your goal, you can either reduce your spending on other items, or extend your savings goal out longer, or change your expectations for your goal. If $6000 for a car isn’t realistic for you, maybe $2000 would be a better goal to start with. That changes your 18-month timeline to only $111/month, or $56/paycheck.