One of the most common questions our clients ask is, “How much should I be saving?” Just like so many other financial questions, the answer to this is most often, “It depends.” The right savings rate for you depends on your age, income, current financial situation, expenses, lifestyle expectations, debt and future goals. However, there are some key factors and practical benchmarks that can help you establish a target savings rate. The following tips can help.

1 – Start with Common Saving Strategies

While it’s important to adopt a custom savings strategy based on your specific needs and goals, it can be helpful to start with generally accepted guidelines.

• Emergency savings – An emergency savings reserve is an important foundation for most financial plans. We typically recommend our clients maintain three to six months’ worth of living expenses in a liquid, low-risk account. This helps ensure you have enough assets available to cover unexpected expenses, such as a job loss, medical event, accident, etc.

• Retirement savings – Establish an appropriate emergency reserve while also taking advantage of important retirement-saving opportunities, such as an employer retirement-plan match. As a general starting point, some financial professionals suggest saving roughly 10% to 15% of gross income for retirement, including employer contributions. Your appropriate savings rate may be higher or lower depending on your age, existing assets, retirement goals and other factors. However, if you’re getting a late start, you may need to save 20% or more to catch up.

• Overall savings – The 50/30/20 framework provides a general rule of thumb to guide your overall savings and spending targets. Using this rule, you would allocate approximately 50% of your take-home pay to pay for needs, such as housing, groceries, utility bills, etc. 30% of your income would be allocated to wants, such as entertainment and travel, and the remaining 20% would be saved for the future.

2 – Consider What Other Factors Impact Your Savings Rate

Using the above strategies as a starting point, consider what factors may impact your savings approach, such as:

• Time horizon – The earlier you start saving, the more opportunity you have to capitalize on the power of compounding. Because savings have more time to potentially compound, money invested earlier can have significantly more opportunity to grow than money invested later. If you’re late to the savings game, you will likely need to set aside a higher percentage of your income to meet your long-term goals.

• Lifestyle and spending needs – Your savings needs are largely driven by both your current and future lifestyle goals. Your current spending can provide an important indication of the lifestyle you may want to maintain in the future. Be sure to carefully track your spending versus savings to make sure you’re setting aside enough to meet your needs.

• Current financial situation – When determining your savings target, it’s important to consider your current financial situation. Existing savings and investments, pension benefits and, depending on your plans, home equity can reduce the amount you may need to accumulate. However, student loans, a mortgage balance and other debts can add to your required savings rate.

• Long-term goals – You may need to save more if your long-term goals include large expenses such as college tuition for a child or grandchild, a second home, significant travel or early retirement.

3 – Ask Yourself Key Questions

To determine your personal target savings rate, consider your answers to questions beyond just, “How much should I save?” The following questions can help you determine a savings strategy that’s right for you.

• What standard of living do I hope to achieve, and at what age?

• What resources do I already have, and what gaps remain?

• How much risk am I willing to take on with the money I save and invest?

The answers to these questions can help you turn a target savings rate into a focused, long-term strategy. Working backward from your goals can help you envision a path forward and remain focused on your long-term vision.

4 – Make Saving as Easy as Possible

The best way to remain consistent is to remove as much friction from the process of saving as possible. The following tips can help.

• Automate contributions to retirement and savings accounts to ensure you’re saving before you spend on discretionary purchases.

• Carefully manage lifestyle creep by ensuring your rate of savings increases with every raise or bonus.

• Regularly review your discretionary spending, including subscription services. Small recurring expenses can add up over time.

• Save unexpected windfalls, such as an inheritance, tax refund or equity compensation, toward your long-term goals, rather than spending.

• Revisit your savings plan on a regular basis and any time you experience a major life event, such as a marriage, divorce, birth of a child, job change, inheritance, a significant change in your health, family or employment, etc.

5 – Have a Plan in Place

While generic rules of thumb can serve as a helpful starting point, they cannot account for the full picture of your unique financial situation, tax exposure, family dynamics and long-term goals. It’s important to have a financial plan in place to guide your decision making and establish a personalized savings target that meets your needs.

At Freedom Wealth Management, we’re here to help you establish a personalized financial plan to help you pursue your long-term goals. If you could use some help determining how much you should be saving, we would love to have a conversation. Please schedule a call with a member of our team.

Disclosure:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.