The short answer: as much as you can.
The longer answer? It depends. But still probably as much as you can.
To figure out how much you should save, start with your goals and work backward. If you want to go on a $500 trip, for example, you might set aside $50 a month for 10 months. Or you could save about $55 a month for nine months. The exact way you go about saving is up to you–it can be more some months and less others—as long as your bill is paid in full by the time you leave for Aruba.
Seems easy enough, right?
What makes saving complicated is you’re often saving for multiple goals at once, while also trying to ensure you set aside enough to cover unexpected expenses that may come up in the meantime. And when you toss in a huge goal like retirement, things get even more challenging. How much is 70-year-old you really going to need to live? Will you have health-related expenses or a mortgage—and will you want money to travel? It’s hard to guess when it’s so far away. But there are some basic guidelines you can follow.
So how much will I need for retirement?
According to the Center for Retirement Research at Boston College, most of us will want about 70 percent of our current income to live comfortably in retirement. To reach this, researchers recommend we save about 10 percent of our salary starting at age 25. Those of us who start later may need to put away a greater percentage to stay on track.
But while we’re saving up for retirement, we’ll also have other financial goals, like making a down payment on a house. That’s why most financial planners recommend we put about 20 percent of our income to savings. That 20 percent includes money saved for short-term goals, like that vacation you really want to take, and what we’re contributing to longer term goals like retirement.
That sounds like a lot of money…
If that 20 percent seems a little out of reach, don’t worry. If you’re like most Americans, you’re probably saving closer to 6 percent, according to the Federal Reserve Bank of St. Louis. What should we do then?
Start small. Forty percent of Americans can’t cover a $400 emergency expense. If you set aside $40 a month you’ll be better prepared for an unexpected expense in 10 months. From there, aim to save up $1,000. You can get there in just over two years if you keep saving $40 a month.
Then work your way up to saving enough to cover three to six months of expenses. (That way you can still cover the basics if you lose your job.) But along the way, remember to take advantage of opportunities that help your future self. Pay off high-interest credit card debt as soon as you can, and make sure you’re contributing enough to your 401(k) to get your company match, if you have one, as well as investing what you can for medium-term goals.
And if you haven’t already, work toward building a budget that will help you meet your savings and spending goals.
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