Reputable financial advisors, websites and your mom say to save for retirement, college, a down payment for a home and emergencies.
- A typical response might be, “Yeah, but how much?” and “When?”
Libraries of books have been written on this subject. The implication is that determining your proper savings rate involves solving differential equations, brushing up on Excel functions, and reading the entire US tax code. If you’re not ready to do that, just turn everything over to an expert. Right? Not really.
Let’s talk about three things that may get in the way of people saving—and then set those obstacles aside and make it easy to do on your own, no matter your age or stage of life.
- It’s hard. Perhaps you don’t make enough money to save aggressively or it’s psychologically difficult to set aside money instead of spending it. For most of us, it’s a combination.
- Taxes. 401(k). IRA. Roth IRA. 529 college savings plan. Savings account. Savings bonds. Why do we have so many boxes to put our money in? In three letters: the IRS. The government encourages us to save by giving us a tax break when we do. Unfortunately, we now have so many savings vehicles to choose from that the easiest option is to just say, “I’ll think about it next month.” And we haven’t even talked about investment options yet!
- Nobody knows the future. What if I save for college and my kid has other plans? What if I max out my 401(k) and then need the money before I retire? Again, the easiest response is, “I’ll figure this out later.”
Pick a number
But here’s one thing to realize: choosing the wrong type of account or making a wrong guess about the future is a small mistake. Failing to save anything is a big mistake. Here are a few rules of thumb when it comes to saving through the ages.
- If you’re young, save 25%. That’s 25% of your gross pay, before taxes. You can count debt repayment as savings, and repaying student loans should be a priority. The rest of the money can go toward a down payment fund, college fund, and retirement savings.
- If you have kids in college, you probably can’t afford to save unless you’re exceptionally wealthy. Get your 401(k) match, avoid parent loans, and send the rest of your money to the bursar’s office.
- If you’re 50 to 65, save 30% or more. This is the age when most people do most of their retirement savings. Tuition bills are a bad memory. The kids are out of the house. You can downsize. Plenty of families squander this opportunity. But not you, right?
These numbers are probably higher than you’ve seen elsewhere. That’s because they’re not designed for the best-case scenario. They’re designed with enough of a cushion that if everything goes right, you’ll end up with even more money that you’ll need for retirement.
Matthew Amster-Burton is a personal finance columnist at Mint.com and author, most recently, of Child Octopus: Edible Adventures in Hong Kong. Find him on Twitter @Mint_Mamster.