by Christy Bieber | Nov. 5, 2019
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Setting aside enough money to meet your financial goals is one of the most important parts of managing your money. Unfortunately, recent research from The Ascent found that close to half of Americans have no idea how much they should be spending and how much they should save.
If you don't know how to allocate your cash to prevent overspending and save enough, you won't know if you're on target to hit your financial goals. Without a formalized savings plan alongside your budget, you probably won't save enough.
The good news is that you don't have to remain among the 48% of Americans who told The Ascent they didn't know what to save versus what to spend. Take these steps to set good savings goals for your situation.
The first step to figuring out how much to save versus how much to spend is to know what you're saving for.
At a minimum, you should save money for a secure retirement. Social Security replaces only about 40% of pre-retirement income, which isn't nearly enough to live on. And most people don't get pension income from their employers. That means having money invested for retirement to supplement your benefits is essential.
You should also save three to six months of expenses in an emergency fund and put money aside for big purchases such as a house, vacation, holiday shopping, or other upcoming expenses. Many people also save up for a car so they don't have to carry a car loan or save for home repairs so they don't need their emergency fund when these expenses inevitably arise.
Once you've identified your financial goals, you need to know how much to save to achieve them. Break those goals into more manageable small objectives and figure out what you need to save each month to accomplish each one.
For example, if you're hoping to save an emergency fund of $9,000 to cover three months of living expenses and you want to hit this goal within a year, you'd need to save $750 per month.
Budgeting for long-range goals, such as saving for retirement, can be harder.
Many financial experts suggest setting aside 10% of your income, but this may not be enough, depending on your income and when you start saving. A $1 million nest egg would produce around $40,000 in retirement income if you follow the 4% rule, which says you can withdraw 4% of your retirement account balance during your first year of retirement and increase withdrawals each year to account for inflation.
If you start saving at age 35, you'd need to save about $820 per month to hit the $1 million target by 65, assuming a 7% return on investment. So, unless you make about $98,000 per year, you'll have to set aside more than 10% of your income to hit your target.
To make sure you don't have a shortfall, consider using online savings calculators to see how much you'll need for those big goals that are far off in the future -- then use those numbers to set your goals.
After you've identified the amount you need to save, it's time to set up a budget that allocates saving and spending money.
If you need to save $800 per month for retirement, $300 per month for an emergency fund, and $400 per month for various other financial goals, your monthly savings target would be $1,500. Add up your monthly spending plus your savings to see if you can afford to save this much and still cover essential living expenses.
If you don't have enough income to save as much as you need and spend on the essentials, you'll have to adjust your budget. This may involve increasing income, decreasing spending, or modifying financial goals. The key is to balance the budget so you don't wind up reaching for your credit cards to cover expenses and so you can save enough to realize your dreams.
If you're one of the 48% of Americans who don't know how much to save and how much you can spend, you can figure it out. Sit down today, set your goals, and create your budget so you can better manage your money and achieve big things with your hard-earned dollars.
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