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How Much Should You Be Saving?

{ Posted on Apr 01 2010 by Marcus Alston }

The most important thing is not how much you save (as my father used to say), but saving something, even if it is $5 or $10 or $100 per week.  This way you get into the habit of saving.  You should build up an emergency fund first which should be equal to 6 months of your income and develop a retirement plan.  If your job has a 401K program or equivalent, this is a great place to start.  If your employer has any kind of percentage match, you should put in at least that percentage and your employer will match at a certain percentage (often 50%, 75% or 100%) up to a certain percentage of your salary (often 3% or 4%).  If you have high interest rate credit cards, you will need to balance your saving with paying off these cards so that you can avoid wasting money paying the high interest on these cards.  For instance, if you have debt at 15% per year, each dollar you pay down per year saves you $1.15.  That’s a 15% return on your money!  See my post on paying off debt for more ideas.

Most financial experts say as a general rule you should save at least 10% of your income per year, because you will need it for retirement.  If you are in your 20’s or 30’s, I suggest being aggressive and saving even more if possible because of the time value of money.  You have more time for your money to grow the earlier you start saving in life.  Also, the younger you are the more likely you are to have more disposable income and the less likely you are to have expenses such as a mortgage and school tuition payments or large health care expenses.  If you are 40 or over and have not saved yet or have very little in savings, you may also want to save more to try to catch up in order to have a nice sized nest egg when you retire.

If you are 20 years old, you only need to invest about $199 per month to save $1 million by the time you’re 65, assuming your investments returns 8% per year on average over 45 years. But if you wait until you are 30 to start, you’ll need to set aside about $446 per month to save $1 million by age 65.  If you wait until you are 40 to start, you’ll need to set aside about $1,046 per month to save $1 million by age 65.  See the chart below for more examples (assumes an 8% return in an investment such as a stock or mutual fund and 3.1% inflation).  I used a millionaire calculator to compute this:

Age Starting to Save Amount Needed to Save Per Month to Save $1 million by Age 65
0 $42
5 $62
10 $91
15 $134
20 $199
25 $297
30 $446
35 $676
40 $1,046
45 $1,664
50 $2,784
55 $5,141
60 $13,610

Just for fun, see what amount would you have by the time you reach age 65 if you saved only $297 per month ($5,400 per year) beginning at the below ages (assuming your investments returns 8% per year):

Age Starting to Save Amount Saved at 65
0 $6,865,527 ($1M at age 40)
5 $4,657,723 ($1M at age 45)
10 $3,155,129
15 $2,132,488
20 $1,436,496
25 $962,816
30 $640,437
35 $421,031
40 $271,707
45 $179,080
50 $100,914
55 $53,841
60 $21,804

Keep in mind that the amount you need to save each year depends on many factors including how you invest your savings, what rate of return you earn on your investments (for example, we have assumed 8% here, but if we were to use 6%, your investment nest egg would be significantly lower), how much money you will need in retirement, and the level of security you seek that you will not outlive your savings.  Adjusting any one of these can have a significant impact on how much you need to save.

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Copyright © 2010 by ConsumerMiser.com. All rights reserved.


17 Responses to “How Much Should You Be Saving?”

  1. I really enjoyed writing this article. Still testing capabilities of site.

  2. There is saving and saving. Everyone should save and invest in their future. Back in the seventies, I wanted to start buying some woodworking tools. I found it difficult to put aside part of my allowance (what my wife and I decided was our individual discretionary extravagance). I would take my allowance cash and at the end of the month, put what was left over into my personal savings account. From that, I would purchase presents for birthdays and christmas or other significant anniversary’s. My tool dreams languished. Since I took my allowance in cash, I came up with a plan that I heard my dad tell some of the young fellers that worked for him. Every day, when I came home from work, I took all my loose change and put it in a five gallon water jug. What ever I bought during each day, I always paid in dollar bills. Six months later, there were five inches of change in the jug. I bought a professional grade table saw. All my tools have been acquired in the same way. Talk about out of pocket? Give it a try.

  3. Denis. I remember the coin jar fondly and have my kids do the same thing today. I also have a jar or two still, but I move it into a separate savings account so I can gain some interest. It does work and it is impressive how you have used the “spare change” system patiently to buy things in cash, especially the professional grade table saw and the tools. I feel a blog post idea being generated! Great ideas. Thanks. Keep them coming!

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