A A A

How Much to Save and How to Prioritize Competing Budget Needs

By Stuart Robertson

You may be aware that experts recommend you will need to save 10%-15% of your income over a 30- or 40-year career to build up 10 times your annual earnings by age 67. This is believed to enable you to live at your standard of living.

That all sounds good, but we all know there are tons of competing priorities between our needs, wants, paying off debt, building emergency savings, and the list goes on. So, let’s get into saving needs, and then some ways to think about prioritizing between saving and debt management. We suggest you read our previous blogs on How to Budget and Manage Your Money Smart and How to Manage Loans and Credit Cards Successfully for a more holistic framework.

Building Up Your Emergency Savings and Other Saving Categories
The average American has an unplanned financial expense (aka. a financial shock – medical, car issue, appliance failures, lost a job) every few years if not every year. Meanwhile, 69% of Americans have less than $1,000 in savings accounts. That's not a good recipe for success for many of us. You quickly get a sense of how important having some savings really is.

Let's consider that savings can be bucketed into three categories:

  1. Emergency / Short-Term – you will need the ability to access this bucket at any time and quickly to manage an unexpected expense. Most people will want to put this in a bank savings account to earn a little interest and keep it separate from their spending/checking account.
  2. Mid-term / Big Purchase – you may want to get a car, have money for a down payment on a house, or other important purchase. You will save some in a savings or a money market account, and you may also choose to invest some in the market knowing there is risk and reward to consider if you do. If it's for a child's education, consider starting a 529 plan.
  3. Long-term / Retirement – Ah, the option to pursue your other dreams without a job. Investing in stock and bond funds are the predominant way to build over the long-term to get to this destination. A 401(k) plan and/or IRA are typical vehicles to use. If you have access to a 401(k) plan, this can be the automatic way to work towards saving 10-15% of your income each year. A company match and higher contribution limits than IRAs can help you get there.

Find a Good Interest Rate for Short-Term Savings
Savings accounts and money markets are typically the better options for short-term savings. Savings accounts are backed by FDIC up to $250K and money markets are backed by SIPC for up to $500K. You can feel pretty secure with either option that you’ll get your money back if any of your institutions were to fail. Money markets have a little more risk as it possible they can come off the dollar, but from good providers, this is unlikely.

Many saving and money market accounts pay low interest rates. That said, there are some that pay a better rate which can help you earn more over time. Ally Bank or Capital One may be worth considering for a higher interest rate savings account. Vanguard, Dreyfus, and several others tend to have higher interest rate money markets.

Setting Your Financial Priorities
So how should you prioritize saving vs. debt payment? Everyone’s situation is different. That said, in general, we suggest the following in aligning your priorities to gain control and put your money to work for you:

  1. Review your earnings and spend over the last three months and categorize into the 50-30-20 buckets. If you are not earning more than you spend and/or not aligned with 50-30-20, what moves can you make? This may include finding a place with lower rent or a lower cost car if your needs spending is well over 50%. It may be simpler like cutting the amount you order in or how much you spend on clothes.
  2. Build up a savings account to $1,000 if you haven’t already. This helps you cover a financial shock that can easily arise.
  3. Pay off your credit cards or build your plan to do so.
  4. Take advantage of your 401(k) and get your company match at minimum. You want to build to 10-15% of your earnings in a long-term account. If you don’t have a 401(k) option, start an IRA. Unless you are in financial crisis, if you receive a 401(k) match, you will want to participate in your 401(k) enough to get it, as well as work down your credit card debt at the same time.
  5. Focus on getting your short-term savings to at least three months of your income, and as you hit your thirties and forties, get to 6 months or more.
  6. If you plan to or have bought a condo or home, look to have your mortgage paid off by the time you retire or be good with potentially downsizing. This can mean make extra payments, moving to a short-term loan, or other scenario. Know that if you refinance your mortgage, this will start your time frame to pay off your home all over again unless you move to shorter term mortgage. The savings can definitely be worth it, just consider how long you want to manage this major expense.
  7. If you have the ability for extra saving, you will want to consider additional investing options such as a retail investing account or perhaps a 529 college fund if you have children.

Wishing you success on your road to financial freedom!

Industry experts generally agree that, depending on when you begin contributing, a minimum contribution of 10-15%, will be necessary to reach a goal of 8 to 10 times your ending annual salary prior to retirement. You may want to review your current contribution level to determine whether you believe it is sufficient to meet your retirement goals. There is no guarantee that contributions at this level will result in sufficient funds to meet those goals.


Meet the Author

Our low-cost 401k plans are easy to setup online and are supported by our 401k advisors and specialists. ShareBuilder 401k serves small business and medium-sized companies, as well as the self-employed. We offer Roth 401k, Safe Harbor 401k, Traditional 401k, and Solo 401k options. Your 401k plan is paired with investment management expertise and employee education to help you save more.