How Much of My Net Paycheck Should I Be Saving for the Future?

Put some of your savings in the bank for safety, and invest the rest to preserve its value.

Put some of your savings in the bank for safety, and invest the rest to preserve its value.

Your paycheck comes in, the bills go out, and what’s left might not look pretty. Unless you’re rich, saving money is the only way to get ahead financially. Simply recognizing the need to save goes a long way toward motivating you to actually go ahead and do it. Once you start saving, however, you need to figure out how much. Don’t go looking for exact numbers written in stone, because people have different needs. Instead, approach the question by identifying what kinds of expenses your future holds.

Safety Cushion

Life’s emergencies, big and small, often don’t announce themselves ahead of time. Suppose your car gets wrecked. Without another way to get to work, you might lose your job and even your home. To protect your health, safety and quality of life, you need to maintain at least $5,000 in your savings account to cover most emergencies that involve large, sudden costs. If you don’t have this kind of money in savings yet, then keep your budget to the bare minimum and save as much of your paycheck as you possibly can. Once you build up your safety cushion, you can dial back the savings rate and spend more money on enjoying life.

Retirement Savings

It helps to sit down with a financial planner at some point early in your career and figure out how much money you want to have available to you when you retire. You’ll want to have enough money for living expenses, recreation, travel, health care co-pays and whatever else matters to you. To pay for those things you will need a big enough nest egg. Once you determine your nest egg goal size, you can work backward and determine what kind of monthly contributions you need to make into your retirement account in order to build up that nest egg. Individual needs vary, but 5 to 20 percent of your total paycheck usually makes sense.

Financial Security

Suppose you lose your job or have to stop working for several months to care for a sick parent. Financial security means having enough personal wealth that losing your earning potential for sustained periods won’t deprive you -- or your partner and children, if you have them -- of a decent standard of living. Think in terms of a long-lasting emergency. Decide how many months of rent and groceries and bills you want to be able to afford on savings alone, and come up with a plan to build up this savings within a few years. Treat this money as an extension of your emergency fund, separate from your retirement savings. Loosely, aim to save 3 to 10 percent of your total paycheck for financial security.

Discretionary Wealth

After meeting your living expenses and setting aside money for retirement and financial security, the rest of your paycheck is icing on the cake. But consider this: If you spend most of your discretionary paycheck right away you will limit your ability to save up for bigger luxuries, such as a trip to Europe, a hot tub or a boat. Rather than spending the fun money on small treats like eating out or going skiing, split it up between smaller luxuries and larger ones. Set some of your discretionary money aside in savings and let it pile up for a few years. Your imagination will not fail you in coming up with exciting ways to spend your money.

 

About the Author

Josh Fredman is a freelance pen-for-hire and Web developer living in Seattle. He attended the University of Washington, studying engineering, and worked in logistics, health care and newspapers before deciding to go to work for himself.

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