Savings Made Easy
I came across these commonly asked money questions all the time, I thought I will put together a list with the easy basic answers as a starting point for somebody to quickly assess their savings progress to know whether they are on track for retirement.
How much of my salary should I save each month?
The general rule of thumb is to save at least 20% of your salary each month towards savings.
Everybody knows the earlier you start the better.
The best way to start is to create an automatic savings plan in which you automatically deposit into a savings account.
Create separate account for each goals and name them specifically based on the goal:
- Retirement – 401K, Roth IRA, Traditional IRA
- Emergency Fund
- For major expenses like “House Down Payment”, “Buy A Car”, “Trip To Cancun”
How much should I have in an emergency fund?
Most common advice is to save at least 3-6 months worth of your living expenses in an emergency fund.
Depending on your individual situation, you should consider putting aside more if you feel you may need to take more time to find a new job and if you have a family with multiple children as dependents.
Finding a new job takes 6 to 9 months on average, so I feel setting aside 6 months of basic living expense for emergency fund would be better especially for family with children.
How much do I need to save for retirement?
In general, plan to save at least 25X of your desired income for retirement.
For example, if you have $100,000 expenses per year, you will need a minimum of $2.5 million for retirement.
How much should I contribute to 401K?
First, max out on your employer match, if they match. Don’t miss out on a golden opportunity to take advantage of extra money that is a perk given by your employer.
Even if they don’t match, you should still max out the 401K plan contribution limit for the year (according to the IRS, $19,500 in 2020).
The more the better. In case you are not able to max out the contribution limit, try to save at least 10%-20% of your salary with 10% being the bare minimum.
How much should I have saved for retirement by age 20? 30? 40? 50?
| By Age | X Times Your Annual Income | How much money you should have saved for retirement (This is a general rule of thumb similar to Fidelity Retirement Plan) |
| 20 | 1/4X | Aim to have 25% of your annual income saved |
| 25 | 1/2X | Aim to have 50% of your annual income saved |
| 30 | 1X | Have the equivalent of your annual income saved |
| 35 | 2X | Have twice your annual income saved |
| 40 | 3X | Have three times your annual income saved |
| 45 | 4X | Have four times your annual income saved |
| 50 | 6X | Have six times your annual income saved |
| 55 | 7X | Have seven times your annual income saved |
| 60 | 8X | Have eight times your annual income saved |
| 67 | 10X | Have ten times your annual income saved by the time you retire |
These are not specific recommendations or advice, given that every individual has different goals and lifestyles, and there’s no one size fit all type of savings or retirement plan, so remember to do you own research and calculation for your unique situation.
I hope these FAQs are helpful to you, let me know in the comment below if you have any other questions!