Money is such a personal issue and when it comes to savings there's no such thing as a one size fits all approach. We all have different responsibilities, different lifestyle qualities, and different priorities and visions of how we want our life to look. Whatever you think your future is going to look like, it is important to try and squirrel away some savings in the honey pot. Having a little fund stashed away can help ease the pressure in life and can help you stay prepped for the unexpected. Emergency savings can lead to financial independence which gives you choices in life and can boost self-confidence and the feeling of being the master of your own destiny.
We know that saving money can be a huge challenge, which is why this rule of thumb plan with some handy personal savings tips could just get you inspired to map out some money goals. We tackle the question of how much should you have saved by 30?
How Much Money Should You Have Saved by Age 30?
Fidelity Investments have a piece dedicated to the question of how much you need to retire. If you were going to follow that map of retiring by the age of 67, it suggests that you should aim for savings equal to your annual salary by the time you are 30. Before you start to panic, remember this is only a basic rule of thumb and doesn't take into account the age at which you want to retire and how you want to live your life post-retirement.
Brian Davis is a real estate investor and founder of Spark Rental, where they help middle-class people replace their salaries with passive income so that they can achieve financial independence earlier rather than later in life.
Davis explains that "using the S&P 500's historical average return of around 10%, you need to save and invest roughly 1/15th of your target nest egg each year if you want to reach financial independence in 10 years."
So if you want to save $1,000,000 for retirement 10 years from now, then you need to save $66,667 per year until then.
If that sounds like a lot, then consider this: figure out at what age you want to retire, how many years you hope to live thereafter, and how much money you'd like to live on each year in retirement.
So if you retire at the age of 60 and plan to live for another 30 years on a $30,000 retirement salary, then you'll need about $900,000 saved up for retirement.
If you aren't in a rush to save all of that within 10 years, though, don't worry. Davis continues: "To reach your goal within 20 years, you need to save roughly 1/49th of your target nest egg each year. To reach it in 30 years, save and invest 1/124th of your target nest egg each year. And to reach it in 40 years, save an invest 1/289th of your target nest egg each year."
If you're nowhere near those targets, then you're not alone.
This 2019 survey from Ameritrade found that a whopping 66% of millennials (those in the age group between 23-38) were behind when it came to catching up with their retirement savings.
Bryce Walker, CPA and CEO of CPA Exam Guy reminds us that "many people think there is a magic dollar amount you should have tucked away by 30, but the truth of the matter is that it depends on your spending, your current lifestyle and your desired future lifestyle."
Everyone will have different goals and different ways to save.
As a general rule of thumb, he says that "you should have roughly one full year of salary saved by thirty to provide you with a buffer against unforeseen financial setbacks and as part of prudent retirement planning."
Life is expensive and with higher rent costs, student loan debt, and living expenses being higher, it's no wonder that keeping hold of a full years income is proving to be a tricky business.
The good news is that when it comes to savings account goals - every little helps. The sooner you start saving, the sooner that you can start to grow your numbers and get closer to those financial goals.
How Much You Should Have in Your Emergency Fund
Alongside saving for retirement, you want to have a little nest egg or lump sum stashed away to cover those unexpected events. Maybe one day your car engine will go kaput, you may need to pay for a pricey medical procedure for your dog, or something out of the blue may send you in to your cash savings. Having a pot put away for this rainy day is perfect planning and helps you avoid getting into hot water later down the line.
For those in salaried positions, Money Under 30 recommends having around 3-6 months of your average savings stashed away. But again, this can hugely vary according to how many dependents you have, whether you own or rent a vehicle or home, whether your job industry is stable or whether it's a side gig industry, whether you have medical insurance covered by your work, etc.
This emergency fund calculator is one of the tools that can come in handy when trying to work out how much you should save for an emergency based on your own set of circumstances.
Wells Fargo recommends rather than stashing this cash under your mattress or somewhere easy to dip into, that you should have a dedicated bank account for such savings. You also want to make sure this is an easily accessible account to avoid penalties for taking out cash early and it's best not to tie your emergency funds up in the stock market, mutual funds, or assets. You are looking for stability here. A traditional IRA could be the best place to put your emergency money fund.
Tips for Reaching Your Savings Goals
So, now we know the importance of having an emergency fund and adding to your retirement savings too, what are some concrete tips that can help you to build up that money number. These savings targets etched out below can help you to make the most of your own average net worth.
Set Monthly Targets
Rather than randomly assigning money to different pots, it helps to have a goal in mind when it comes to your savings and income. Are you saving for a down payment on a house? Are you looking to hit those retirement savings goals head-on? Are you wanting a comfortable retirement plan? Are you wanting to get your student loans cleared? Whatever your financial plan, setting monthly targets can help make everything crystal clear. If you are serious about your savings you can seek out help and dedicated advice from a financial advisor or play around with this retirement saving calculator. It also helps to know your credit score so that you can start climbing that ladder to improve your position should you need to take out loans or credit cards or mortgages in the future. You can check out this link for accessing your credit score. When it comes to money matters, knowledge is power and the more you know, the better equipped you will be to make the right choices about your retirement income and any other savings you are making.
Use a 50/30/20 Budget
Having an action plan for your income is a great way of making that money move further and gets you closer to your savings goal. The 50/30/20 plan gives you a great breakdown of what percentage of your income gets spent and what gets saved.
In short, this plan suggests that you get to spend 50 percent of your pay package on your usual spending habits like rent, food, bills, etc. For those who have outgoings that surpass this fifty percent target, it may be time to look at trimming back on your spending or consider a side gig or extra hours for a while (if that's possible).
The 30 percent gets to go on fun things like travel, seeing friends, clothes, whatever you enjoy. Then the remaining 20 percent gets split between paying your student loan and credit card debt and tucked away into savings. Of course, this budget plan isn't set in stone and you will need to adapt to suit your own equivalent goals.
Cut Back on Expenses
We know this is the least fun tip when it comes to personal finance goals. Wherever you can trim the fat when it comes to your outgoings you should make every effort to do so. Writing out all your expenses and keeping track of your spending can be an illuminating way to see exactly where your money is going. Look at your direct debits and your product costs and see if you really need that extra monthly streaming site, can you shop at a cheaper grocery store for a while, etc. Having it all mapped out in front of you is one of the best ways to see what your spending choices look like in black and white. These tips from Money Saving Expert can also help you to stop spending. The less you spend today, the earlier you can hit retirement age.
Automate Your Savings
Saving successfully is all about discipline and for those of us who struggle with retirement contributions, savings, and anything to do with stockpiling our earnings for a rainy day, automation can make all the difference. Automatically diverting an amount from your paycheck to your savings account takes all the thought, hesitation, and effort out of it. You can also transfer those surprise influxes of cash into your savings too and help to boost your financial goal without the fuss.
You don't need a ton of money to start investing, even just a little can go a long way when it comes to adding to your retirement fund. Of course, always seek some advice from a financial expert before you get into investment.
Zach Bachner, CFP of Summit Financial says that his favorite recommendation to give to young professionals is to consider a Roth IRA, if possible.
"A Roth IRA provides tax free growth and tax free withdrawals throughout retirement," he explains. The main attraction of a Roth IRA is that you pay taxes on your income now while investing, not later when you're withdrawing the cash.
"Since many 20 year-olds are in a lower tax bracket now than they will be later in their working years, this is a great reason to consider a Roth."
As you start to earn more money throughout your professional career, and therefore move upward in tax brackets, then it's worth considering a traditional IRA. He says that traditional IRAs "get you a deduction on your taxes, but all withdrawals are taxed as ordinary income throughout retirement."
If you can't get your head around your 401k and your Roth IRA, then this easy to go guide from Nerd Wallet could be the perfect place to get started.
Retirement may seem like a lifetime away and looking at the numbers, the average retirement savings may seem way out of your current league. But the earlier you get started on making a plan for your annual income and understanding money and banking matters, the earlier you can start making those small tweaks to get saving and to live the life you want to, free from financial woes.
What does your retirement goal look like? Do you have any recommendations to help others get started on their retirement planning journey? Share all your retirement goals with us in the comments and let's get saving together.
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