When to Save, Why to Save, How much to Save
Saving is not a natural impulse. There are too many things we want right now. We want that new pair of shoes. We want that big screen TV. We want to keep up with the Joneses. Often times, these non-stop wants we are experiencing distract us from the big picture. We should be asking ourselves questions like “When do I want to retire?”, and “How much money will I need annually in my retirement?”. For a quick refresher on how to save your first $1,000 click here. No one dreams about busting their back, working hard in their career their entire adult life, just to retire with too little, and be pushed right back into the workforce. Situations like these are why we started the Money Dojo. Everyday people don’t have the time to drown themselves in economic theories and statistical algorithms; they want to know when, why, and how.
When: Now. If you’re a young twenty-something year old reading this, fantastic. You’re at an advantage. If you’re a little more seasoned, that’s fine too. You’ll just have to work a little harder to get to where you want to be. Regardless of your current situation, you can’t go back in time, so you’ll have to make the best of what you have now. Just for a little perspective on the effect time has on saving, consider this: Katy is a 25 year old, who plans to retire by the time she is 60 years old. Every month she contributes $1,000 to her retirement account. Expecting a mere 5% annual growth (which is entirely realistic), Katy will have $1,138,035 in her account when she decides to retire. Philip, on the other hand, didn’t decide to start saving for his retirement until he was 40 years old. He too wanted to retire at age 60. Philip began to contribute $2,500 a month to his retirement account, and got the same 5% return. When it was all said and done, Philip actually contributed $180,000 more to his retirement than did Katy. Philip’s final total however, only $1,041,557. The reason saving right now is important is because of interest, and the huge effect it has on your money over time.
Why: 69% of Americans have less than $1,000 in savings. 28% have nothing at all. Social Security may not even be around whenever much of today’s younger workforce decided to retire (barring a major rehaul). Even if it were around, it isn’t likely that you will be able to survive on Social Security checks alone. Simply put, you save now so you won’t have to work your entire life.
How Much: Generally, we advise you to put away at least 15% of your paycheck each month to savings. 15%, however, is just a benchmark. You should save as much as you can every month. For some people, that may be 30%, for others 10%. We’re all at different places in our financial journey. At the risk of stating the obvious, the more you can save, the better. The more you save now, the more you’ll have to spend later.
Saving is a choice, and no one can make it for you. Just like with all of life’s choices, you may have to give up something that you really want right now, in order to set yourself up for a successful future.
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