Something I don’t think I talk about enough is the actual percentages or amount that you should save each year. While I heavily emphasize investing as the gateway to living the life you want, it’s just as important to consistently save a certain amount of money. So, I want to take you through a couple of scenarios or accounts that you should have and how much money you should be putting into those accounts each year.
Retirement Savings
The first account is your retirement savings, which can depend on factors such as age, lifestyle, and when you plan to retire. However, I prefer to speak in percentages. According to experts, you should be saving about 10 to 15% of your income in a retirement account, whatever that may be. This percentage may vary based on your income level, and you can be more aggressive or passive. Nonetheless, the 10 to 15% range is a great amount to have in your account.
Emergency Fund
The next account that we have is your emergency fund. This account should be able to cover a certain amount of expenses for a certain period of time or a surprise expense that may occur. Something that I like to stick with is being able to cover about 6 to 12 months of your expenses in an account. That way, if you lose your job or something happens and you can’t earn any money, you will have 6 to 12 months to figure something out or to be able to buy yourself some time while you look for another job. Now, I understand 6 months can be a lot and a years’ worth of your salary saved up can take some time, so just start out with having one to three months of your expenses saved up and then eventually work your way to the 6 to 12 months. Remember, this is a marathon, not a sprint.
Short Term Goals
This account can vary depending on what your short-term goals are, whether it’s purchasing a new iPhone or putting a down payment on a house or car. Those numbers are going to be drastically different, so what I would recommend is having your savings goals updated at least every other month for the short term. This allows for flexibility in your account to be able to spend what you want to spend when you want to spend it, as well as keeping you on your toes as far as how much money is in the account at any given time.”
Long Term Goals
Now for the long-term goal account, this is something that starts out years in advance because you’re looking so far ahead at what kind of future expenses you might have, such as paying for a child’s education or trying to retire early. Anything that’s a long-term goal goes into this account so that you can accurately track how much money is in there. Something that I would recommend is maybe putting this in a low-risk investment account to be able to get a little more return on this money. Since it is a long-term goal, it has time to compound.
Lifestyle Expenses
When assessing your current lifestyle, you should examine your frivolous spending habits. One thing to watch out for is lifestyle inflation, which occurs when you spend more money on things just because you earn more money from your job or side business. I don’t necessarily think this is a bad thing, because if you’re making more money, you should treat yourself. However, I still believe that it should be a percentage of your income. For instance, if your lifestyle expenses are 10% of your income each year, and you make $50,000, that means you can spend up to $5,000 on discretionary items. However, if you make $500,000, you may not need to spend all 10% on your lifestyle, so you could adjust the percentage accordingly. But you definitely don’t want to increase that percentage as your income goes up.
