A solid financial foundation is crucial for long-term stability and peace of mind. An adequate amount of savings is critical to building this strong foundation.
You may need to save for many goals, including college fees, emergencies, a down payment for your home, and, last but not least, your retirement. Hence, determining exactly how much you should have in savings for each can be complex and depends on your situation.
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The average amount of savings for each individual can range significantly depending upon various factors like income levels, age, family size, geographic location, household expenses, and different personal situations. Differing external economic factors, like inflation, returns, etc., affect savings levels.
According to recent data published on Zippia, the average American household savings is $41,600. However, this number is heavily influenced by a small number of individuals with significantly higher savings than the majority, as the median household savings is only a meager $5,300.
It’s important to acknowledge personal financial situations vary widely, and many people have different savings levels based on their circumstances and financial objectives.
Here are the steps you can use to determine the amount of savings you should have:
To determine how much you should have in savings, you should start by evaluating your savings goals. Determine short, medium, and long-term plans regarding your finances. It can include objectives like buying a house or car, planning a vacation or wedding, retirement funds, etc.
When your financial goals are laid out, you can start prioritizing them based on your situation and saving accordingly.
Usually, it is encouraged to follow a 50/30/20 strategy when determining how much you should save versus spend each month. This strategy allocates your monthly income into three categories:
- 50% towards necessities
- 30% towards wants
- 20% towards savings
This allocation may only work for some based on their financial situation. Still, it gives a ballpark to keep you focused on achieving your savings goals.
You may be earning well, but you need to track your expenses and evaluate them occasionally to achieve your financial goals.
It would help if you started this by tracking your monthly cost for 2 to 3 months, classifying them as unavoidable and avoidable. You should include all the monthly expenses, including rent, mortgage, insurance, groceries, utilities, gas, entertainment, and monthly payment for any outstanding debts.
Tracking your expenses on blank budget printables will help you assess your monthly spending to start eliminating any unnecessary expenditures you’ve been making and put those funds toward savings.
Having a rainy day fund is vital to a sound financial plan. It provides a safety net to deal with unforeseen expenses relating to job loss, unexpected car breakdowns, house repairs, or medical crises.
But most of the time, people have a question: how much money should they have in savings for an emergency fund? The popular opinion is to have three to six months of expenses saved in the rainy-day fund. But consider building a larger safety net if you have an unstable job or unique financial situation.
When setting your financial goals, it’s essential to consider your age and stage of life. Suppose you’re someone who’s just starting in their career. In that case, you should focus on building an emergency fund while paying any educational loan debt. As you move ahead in life, you can shift your focus to building your retirement savings.
Also, consider your lifestyle to determine how much you should have in your savings. If you plan to travel around the globe once you retire, you will need more money saved than someone planning to retire minimally.
If you have debt with exceptionally high interest, it is vital to pay off the debt along with the savings; otherwise, the growth of your savings will negate the interest you are paying on the debt. Also, as you pay off your debt, you free up more money towards your financial goals.
As your income, expenses, and life circumstances evolve, you must adjust your financial goals accordingly. Your life changes, like a job change, marriage, having kids, etc., impacts your finances, and you should adjust your savings suitably. A timely review of your objectives helps you stay on track and achieve your long-term goals successfully.
There are several ways to accelerate your savings and save money faster:
If you start tracking your monthly expenses, you’ll notice there are many unnecessary and discretionary expenses that you can cut back on. These can be expenses like eating out, buying coffee, going out with friends, etc.
It would help if you looked for alternate ways to increase your income, for example, investing your money, picking up side hustles in your free time, or finding new job opportunities that pay you higher.
Setting up automatic transfers to your savings as soon as you receive your paycheck helps you achieve your financial goals more quickly. This ensures you save a sufficient amount of money each month by giving up the temptation to spend more since you’ve limited funds in your account.
A budget helps you track your income and how you spend it by allocating a specific amount for each expense you incur during the month. Budgeting enables you to reduce unnecessary expenses and stick to your financial goals.
If you have high-interest debt, a considerable amount of your debt payment is going toward interest. It would help if you prioritized paying off such debts to save the money going towards interest.
Using coupons, comparing prices, shopping for deals, and buying generic products can help you save money on everyday expenses. Even though you may save a small amount of money, it adds up eventually.
If available, take full advantage of your employer benefits, such as retirement matching contributions or flexible spending accounts. These benefits can help you save more money over time.
Saving money faster requires discipline and consistency to change your spending habits and stick to your financial plan.
People often need help determining how much they should have in their savings at different ages. Even though any financial expert provides no fixed numbers, retirement plans provider Fidelity Investments has provided a general guideline based on your income level and age.
They recommend saving at least:
- 1x of your income by the age of 30
- 3x of your income by the age of 40
- 6x of your income by the age of 50
- 8x of your income by the age of 60
- 10x of your income by the age of 67
They make this recommendation assuming you’re planning to retire at the age of 67. If you plan to retire earlier than 67, you need to be more aggressive and save more to compensate for the loss of income from your earlier retirement.
Determining the amount of necessary savings is a personal process. It depends on factors like long-term and short-term financial goals, income level, expenses, age, lifestyle, and debt.
You need to evaluate your current financial circumstances and set your goals to determine the right amount of savings for your situation. Using tools like budgeting, tracking expenses, and lifestyle changes will help you achieve these goals and attain financial stability and peace of mind in the long run.
This article by Anika Jindal originally appeared on Wealth of Geeks, and was republished with permission.
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