Saving and investing money on a regular basis is a primary way to accumulate wealth. The amount of money you need to save and invest depends on your current financial situation and your future financial goals, such as how much you earn and your total expenses. Understanding how much to save and invest places you in the best position to meet your financial objectives.
Compiling an emergency fund allows you to continue to pay your expenses in the event that you no longer earn a stable income. According to Bankrate, the three-to-six-months rule of thumb for how to much to save in an emergency fund may no longer apply. Some experts suggest that you save nine months' to a year's worth of living expenses in an emergency fund. Failing to establish an emergency fund can place your assets at risk if you become unemployed or disabled and can’t supplement your income.
Saving for Retirement
Saving for retirement is a long-term investment that requires strategic planning. According to the U.S. Department of Labor, you should save 70 to 90 percent of your preretirement income. For example, if you earn $70,000 a year, you will need around $49,000 to $63,000 in annual retirement income to enjoy your same standard of living. Other factors to consider when determining the amount you should save is how long you expect to live and your other sources of income, such as Social Security or pensions.
Investing in Financial Instruments
When it comes to the financial markets, you should invest only money that you do not need in the immediate future. How much you invest is dependent upon how much you earn. Investing a lump sum of $25,000 is likely difficult for a person who earns a low salary. The great thing about investing is even small investors can benefit. For example, just $50 a month invested in a well-diversified mutual fund or exchange-traded fund can grow to a large sum over time because of the power of compounding.
Importance of Saving and Investing
Saving and investing your money in profitable assets is vital to securing your financial future. Writing down and prioritizing your financial goals makes saving and investing easier. It’s important not only to save but also to create a plan that shows how much and how long you need to save to reach your goals. Visiting your financial goals periodically helps you determine if you’re on track or if you need to make adjustments.