What Percentage of My Income Should I Save or Invest?
How much you decide to save for retirement is a choice that is very particular to your situation. The decision you make should depend upon your cash flow and ability to budget. Despite the personal nature of that choice, however, financial experts agree that starting your retirement saving early is important, as is committing as much as you can afford. If you're saving for retirement as well as a short-term goal, such as a down payment on a house, you'll need to coordinate between the two.
There is no hard and fast rule about what percentage of your paycheck you should set aside, but most experts agree that 10 to 15 percent of your gross pay is appropriate for retirement savings.
Why Is Savings Important?
Having some type of savings, be it a simple savings account, an investment account, a piggy bank or a wad of cash stuffed in a mattress, is important for many reasons. At the bottom end, having money set aside for a financial emergency can mean the difference between life and death, shelter and homelessness. At the top end, savings of the right type can help you accumulate wealth so that when you retire, you have enough money to support yourself. Essentially, savings can be separated into three categories: emergencies, short-term goals and long-term goals.
Emergency Savings: Just in Case
Experts tend to agree that you should have an "emergency fund" to back you up in case something disastrous happens and you find yourself without income. The rule of thumb is to have saved up three to six months' worth of living expenses. For example, if you spend $5,000 per month on everything – housing, food, utilities, transportation, debt payments – then at minimum, you should try to save up $15,000 to hold you in place if you lose your job.
Emergency savings are important to have, and anything is better than nothing. Take stock of all your expenses and your income and determine what you can and cannot live without. Then start putting away as much as you can (after funding your retirement) until you reach that emergency savings goal.
Savings and Investment for Retirement
Savings for retirement is just as important as emergency savings, if not more so. Although emergency savings is there to meet immediate (and sometimes desperate) needs, your retirement savings is what will support you when you're no longer working.
Special investment accounts made just for retirement, such as IRAs and 401(k)s, are some of the best retirement vehicles around. So how much should you put in them?
How Much to Save for Retirement
About 10 to 15 percent of your gross income is the general recommendation by most financial planners for retirement savings. This means that you're saving 10 to 15 percent of each check before taxes are taken out. If you make $20 per hour and are paid every week, and you work 40 hours per week, your gross pay is $800. Using the recommended amount, you should be saving $80 to $120 per week for retirement and investing it in an interest-bearing account.
Take Advantage of Employer Matching
If you have a 401(k) through your employer, and your employer provides 401(k) matching, you're in luck. You can still save that $80 to $120 per week without losing as much from your paycheck. Using the example above, if your employer offers a 5 percent dollar-for-dollar 401(k) match and you elect to have 5 percent withheld from your pay each week, you'll have $40 taken from your check each week, and your employer will then contribute another $40. You'll be meeting that $80 per week goal, but you'll only be spending $40 per week of you own money.
Short-Term Savings and Investment
A short-term financial goal might include saving for a down payment on a house or for a vehicle, or maybe you want to save for a vacation. For these types of goals, how much you save will depend upon how immediate the need. A house or a vacation, for example, might not be immediate goals. A car, on the other hand, might be something you have to have sooner rather than later.
All the same, for short-term goals that are not emergent, saving as much as you can afford to set aside after funding your emergency and retirement savings is the key. Decide how important the thing is that you're saving for and plan accordingly.
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.