How much money should I be saving? Your time-travelling self says “more”

“I’m 27. How much should I have saved for retirement?”

“I spend $800 a year on travel. Is that normal?”

“How much of my paycheck should I put away?”

“Is it okay that I spend $200 a month on yoga?”

I get these kinds of questions a lot from other millennials, and it all boils down to a single question: how much should I be saving at my age?

And as simple as that sounds, it’s hard to know. We don’t go for an annual exam each year for our finances. We don’t have a doctor to tell us if our money is healthy or unhealthy. And there aren’t any well-publicized universal benchmarks for where you should be with your money.

You may be watching your friends spend their money like crazy and that might be the only benchmark you have as “normal.”

But if the older version of you could travel back in time and visit you today, she’d scream at you and tell you to “Save more!!!” And then she’d slap you in the face with her wrinkly grandma hands.

So who do you listen to?

Time Traveller 401k

Comparing myself to others? Not the right benchmark.

My feelings about my own financial health can fluctuate week to week. Sometimes I feel really good about where I’m at, and then I hear about a friend who’s about to buy a house with all the money she’s saved up and I feel like I’m so behind.

Without the right benchmark, it’s easy to get caught up in comparing myself to others and hard to know if I’m saving too much or too little.

So I’ve done some research and put together a money check-up to answer the age-old question “How much money should I be saving in my 20s and 30s?” It’s something I think all of us could use, instead of looking at our peers to see what everyone else is doing.

The 4-point money check-up for millennials

1. How much should I be saving versus spending?

There are lots of philosophies about how much you should be saving versus spending, but the 50/30/20 rule of thumb is widely-excepted and an easy place to start. What exactly is the 50/30/20 rule? It’s the percentage if your take-home pay that you should put into three different buckets:

  • 50 percent needs: “needs” means things like groceries, housing, utilities, insurance
  • 30 percent wants: “wants” includes anything else that’s not in your needs – the fun stuff in life 🙂
  • 20 percent savings and debt: about 1/5 of your income should go toward your savings goals, your retirement and any outstanding debt, like credit cards or student loans

You can play around with the percentages depending on your situation, but it’s a good idea to aim for at least 20 percent of your income to go toward your debt and savings goals. This also means that you can spend that 30 percent on whatever the hell you want – judgment free.

  • How to get started: Calculate your take-home pay, add up your fixed expenses and add up your savings each month. With those numbers you can calculate how close you are to the 50/30/20 ratio.
  • How much to save: 20 percent of your income (includes retirement and the saving accounts above):
  • Goal: Find ways to reduce your big expenses or increase your income

2. How should I have saved in general?

There are two places where we really fall short with our money: when we want to make a really big life change and we don’t have the money to do it, or when sh*t happens 🙂 I recommend that everyone open up two accounts just for those purposes: 1) a Freedom Fund to make sure you have the money to do whatever you want in life, including move to a new apartment or house 2) an “Oh sh*t!” emergency fund, just in case something really bad happens, like losing a job or having to fix your car. If you have any other major expenses coming up, like buying a home or getting married, open up a separate account just for that, too. Just keep your savings as far away from your checking account as possible!

  • How to get started: Open up an “Oh, sh*t!” emergency fund separate from your regular bank
  • How much to save: At least $25 a week
  • Goal: $1,000 to begin
  • How to get started: Open up a “Freedom Fund” separate from your regular bank
  • How much to save: At least $25 a week
  • Goal: $2,000 to cover basic life changes, like moving
  • How to get started: Open up a “Wedding/House/Baby/Other Major Expense” fund separate from your regular bank
  • How much to save: At least $25 a week
  • Goal: Depends on how big your goal is! Just keep adding to this account steadily over time.

3. How should I have saved for retirement?

This is a tricky one. I’m also not a CFP or investment adviser, so my advice is “Stephanie’s-informational-only-back-of-the-envelope” calculation. Your retirement “number” depends on a lot of things: when you plan to retire, your risk tolerance and how long you plan to live 🙂

If you start contributing 6% of your income at age 25, you should be good according to Fidelity’s awesome interactive retirement calculator. What does that mean for your total savings? Well, by the time you turn 35, you need to have at least one years’ worth of your salary saved up into retirement.

Regardless of your age or what you can contribute, you need to start contributing. Now. Time is the magic ingredient when it comes to retirement, so starting as early as possible, even with just 1% of your income, will make all the difference in the world. Open up a retirement account, and get cracking!

  • How to get started: Start early (at least by age 25) and open up an retirement account
  • How much to save: At least 6% of your salary
  • Goal: At least one year of your salary by age 35

4. Whoa, what should I do if my money is way off track?

Wherever you are with your money, these benchmarks aren’t meant to make you feel guilty or bad about your situation. It is meant to be a kick in the butt to motivate you to look at your money and get started.

If you feel like you’re off track in any of these areas, try to take one small step today to correct it. Even if you’ve never contributed to your retirement and you’re already in your 30s, just ignore the “shoulds” and numbers above, and take the first step of opening up a retirement account.

Even writing this post makes me realize that I need to re-calibrate my own money. I’m definitely falling short of the 50/30/20 rule right now. I’m maybe saving 10 percent of my income right now; my excuse has been that I’d just started my own business and my cash flow is pretty inconsistent. But that’s actually why I should be saving more money!

As the old African proverb goes, “The best time to plant a tree is twenty years ago. The second best time is now.” Pick one place on this list to start, and sow some seeds today 🙂

So after reading this check-in, where do you stand? How’s your financial health looking?

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One thought on “How much money should I be saving? Your time-travelling self says “more”

  1. The Wallet Doctor

    Great breakdown. I really like thinking of things in terms of percentages your 50% needs, 30% wants, and 20% savings/debt is a great rule of thumb. Too bad people don’t learn such principles in school. It could help a lot of people navigate the financial world!

    Reply

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