Your savings rate amount is entirely up to you

By Casey McClurkin

We covered different strategies for debt reduction last time – and there’s almost nothing I’d rather teach people about. But this installment is where the rubber hits the road as I discuss savings!

Let’s start with the term “savings rate.” That’s how much of the money you’re earning, winning, finding, etc. that you save. If you find $100 on the sidewalk, what’s the first thing you do? (I hope you
say ‘try to find who it belongs to’!) But if not, would you spend all of it immediately? Would you save any of it? Let’s say you’re feeling especially responsible and save $30 of that $100 windfall. Your savings rate is 30% ($30/$100 = .3 or 30%). That’s awesome!

At the next level ... How much do you bring in from all sources in a month? Paycheck, alimony, interest, money Granny gives you for your birthday – add it all up! Then how much of that do you set aside in a savings account, piggy bank, 401k, under the mattress?

If you said none, the great thing is that every cent you start saving now is progress! (Progress not perfection, AmIRight?) If you said you save about 10%, you’re probably following what you’ve heard is the “right” amount to save each paycheck, and that’s great, too. What if you’re saving a whopping 50% of your income? I’d say … “What in the good lord heck are you saving that much for?” Just kidding ... kind of.

You’ve probably seen about 179 different recommendations on how much you should save. But remember – one size does not fit all. It depends on your age, your lifestyle, your goals, whether or not you drink Starbucks every day… (btw, interesting phenomenon called the Latte Effect: look it up!). While 10% is often recommended, it doesn’t mean it’s a requirement. If you can save more, do. If you can’t save that much, save something.

I’m a fan of an app called Digits, which takes little amounts (like 30 cents here, $1.50 there) from your checking account and puts it into a savings account for you for free. That’s a great place to start.

The basics

  • If you have competing priorities, such as no savings and a $5,000 credit-card debt, you need a strategy. Try to save at least enough while still paying your minimum balance to get you through an unexpected financial obligation. How much is enough? The idea is to have enough so that you won’t have to use your credit card to get you over that hurdle. Some folks say pick a number, reach that number, then stay there until you pay off your credit card debt. Then you can reevaluate your savings strategy.
  • There is such a thing as saving too much! If you’re obsessing about every little dime spent for the sole purpose of seeing your savings grow, you might need to reassess – you’re allowed to live your life and have fun every now and then. Don’t be so hard on yourself.
  • If you get a raise, you don’t have to buy a bigger house. Save more. Simple.
  • No conversation about savings is complete without mentioning an Emergency Fund. It’s not for a last-minute ticket to Aruba with your besties. This fund is there in case you lose your job and need to pay your living expenses until you have income again. Three to six months of living expenses is what the College for Financial Planning recommends. More or less, to suit your lifestyle.

Bottom line

If you’re saving 0%, shoot for 1%. Then increase a few months later to 3%. If you’re saving 10%, could you save 12%? When you start seeing your savings grow, I’m sure you’ll be motivated to save more. But how? We’ll address in a future column, so stay tuned.

 

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