In order to build a financial security you got to start saving in your life very early on. The more you save the happier you live after you retire.
In fact, if your savings are good enough then you don’t have to wait till 60s to retire. You can retire very early in your life and live happily thereafter.
In this article you will learn how and by how much people from different age groups and diverse backgrounds can save from their income.
The Popular 50/30/20 Budget Rule
I don’t think you need any introduction to Senator Elizabeth Warren. She may very well become democratic nominee for the 2020 presidential election.
But here we are not interested in the politics. I just wanted to discuss Warren’s famous 50/30/20 budget rule mentioned in her book “All Your Worth: The Ultimate Lifetime Money Plan”
What does the rule says?
You divide your after tax income into 3 parts, allocating 50% to your needs, 30% on wants and 20% to savings.
Let us discuss each 3 of them in details.
Needs
Needs are bare minimum requirements which you must fulfill at any cost. One can say Food, clothes and shelter are man’s basic needs. You have to buy groceries to run kitchen, pay mortgage, car payments, healthcare premium and off course electricity & phone bills.
You can also include education for your kids in the needs category.
50% of your monthly salary goes into covering all your needs.
Wants
Wants means something more than fulfilling just your basic needs. Expenditures like
- Eating out in a costlier steak house
- Going to movies, sporting events, vacations
- Spending on Gadgets like iPhone, iPad etc
- Choosing BMW over Toyota
In other words, spending on more discretionary item rather staples. You got to allocate 30% to Wants.
Savings
Savings are where you invest into Mutual Funds, adding money to emergency fund in your bank account etc.
You save money so that it compounds and pays you interest over a certain period of time.
Debt repayment can also be considered as savings.
So allocate 20% for savings.
This gives you an idea where you have to save and where to invest.
How Much of Your Salary Should Go into Savings?
There are folks who come from all walks of life. From blue collar workers to white collared professionals all of you must save something each month from your salary.
Hence to make things clearer I just created a table for different income group.
| YEARLY INCOME | INCOME AFTER TAX | MONTHLY SAVINGS GOAL | MONTHLY SAVINGS GOAL |
| $35,000 | $30,000 | $500 | $6000 |
| $50,000 | $38,000 | $650 | $7600 |
| $75,000 | $58,000 | $950 | $11,600 |
| $100,000 | $72,000 | $1200 | $14,400 |
| $150,000 | $90,000 | $1500 | $18,000 |
So whether you are a trucker or a lawyer you must have monthly and yearly saving goals given above in the table.
At least give a try even if you fail to achieve this target.
Savings at Different Stages of Your Life
Being realistic, saving goals for a person in 20s is definitely going to be very different from a person in mid 40s.
Hence you got to plan according to your expenditures depending upon on which stage of the life you are in.
Savings by 20s
In 20s you are young and restless. Most of you want to spend lavishly on clothes, mobile phones, eating out, holidaying, partying etc.
You just want to enjoy your life by spending as much as you can. There is nothing left for savings by the end of the month.
In 20’s even if you are not saving enough you need to learn the art of saving at least.
20% may be too much for you but you can save at least 10% of your monthly salary. If you are earning $45,000 yearly then try saving $5000.
You can start with opening an emergency fund with a baseline of $1000 and keep adding to it.
Savings by 30s
Your 30s (especially mid) is going to bring so many responsibilities like financing a wedding, buying a house, a car, raising children etc in your life.
Starting a family brings a lot more responsibilities than just being a bachelor. Hence, you got to get serious about savings.
You got to contribute more towards your 401 (k) and even opening up another retirement account Roth IRA.
You also start thinking about investing in mutual funds and other financial assets. Your minimum goal must be saving at least 20% by the time you reach mid 30s.
Savings by 40s
Your earnings will start peaking when you reach 40s. Mid 40s could be the best time to get rid of debt. You can’t get rid all of it but can start the process at least.
Pay back all your students loan, credit card debt, medical bills (if any) etc. You can use this money to further invest in Mutual funds and share market.
In 40s you have to maximize your retirement savings by contributing up to $2000 in 401 (k). You also have to think about higher education of your children.
So continue adding to your 529 accounts and let it grow.
If you are having difficulties managing your finances then feel free to take help of a financial planner.
Savings by 50s
Now in just 10 years you are going to get retired. You need to move beyond mutual funds and start actively involving in the share market.
By the end of 50s you can start buying equities of various large cap companies and adding into your portfolio.
Till then you got to study and gain knowledge about share markets. Start with listening to CNBC everyday for at least an hour.
If you do so you will have enough money till you reach 60s.
Investing is Also Saving
Just fixed deposits or mutual funds are not enough. Invest as much as you can. Not just in financial assets like equities but also in commodities like gold, silver or real estate.
Never underestimate the power of compounding. Diversify your investments across all the asset classes to minimize risks and maximize gains.
To make things easier you can always find a financial planner who can guide you.
If you can’t do any of this mentioned above then at least try to learn living within your means.