We understand that the holidays may be a strange time for an article about boosting your savings. But, as we head into 2021, we also thought it was a good idea to give a few tips so that come next year, you can get on the right track. If 2020 has taught us anything, it is that you need to be proactive in having a savings cushion should something unexpected happen. So, let's take a look at some guidlines and advice for boosting your savings.
- How much should you save? This is probably the first question you need answered to move forward. The obvious answer, as much as you can. But, the common advice given by financial experts is the 50/30/20 rule. This means 50% goes to essentials (rent or mortgage, utilities, food etc), 30% to discretionary spending (clothes, entertainment, dining out etc) and 20% to savings (savings account, 401K, investments etc). However, as wages have not kept base with expenses, many experts now recommend decreasing discretionary spending to 20% and if possible, increasing savings to 30%. If it seems like a lot, that’s because it is.
- What if you are barely scraping by and cannot save 20 or 30%? The first step of any good budgeting plan is just that, plan. Examine your past 3 months expenses and see where your money is going. See where you can cut some spending. 20% or 30% of take home is not easy for most people to put aside but something is always better than nothing. For example, you audit your expenses and see you spend $50 per month on buying coffee. Maybe you can sacrifice the coffee and just funnel that money into your monthly savings. Same goes for other expenses like memberships you rarely use, dining out, excess shopping etc.
- How much of my savings should be in cash? This is absolutely a gray area. Most experts advise having an emergency cash fund that can cover at least 3 months’ worth of essentials and some discretionary spending. More conservative pros suggest 6-8 months while very aggressive analysts suggest very little cash savings if you have no debt, are well insured and can liquidate some of your other assets (such as housing or rental properties). We side a bit more on the conservative side of things given the fragile state of the economy and the potential difficulty in finding a new job should you lose employment. We think 6 to 8 months is very sound advice for 2020 and likely 2021 and that is what we strive to adhere to.
- OK, I have my emergency fund saved so now where do I put the excess? Again, this highly depends on the individual situation. Firstly, if you have a 401K at your place of employment, you should be taking advantage of that. You should max out your employer match (if they offer a match up to 5%, you should at least contribute 5% into your 401K). If you have hit the match max, next consider the IRS max per year. However, 401K is not the only savings vehicle. If you prefer to aim towards real estate investment as part of your strategy, then maybe pull a percentage out towards that. Same could be said of any investment strategy. Just remember, no investment, even 401Ks are really a sure bet. But, it is the only way you will be able to achieve any kind of decent interest rate. Since we last posted about high yield savings accounts, the rates have fallen even more. So you are going to have to put some money somewhere if you want to earn a return that even keeps the pace of inflation.
- How much do I really need to save to retire? Wow, if you think we can answer that for you, you are on the wrong site. What we can do is tell you some of the variables you need to know to answer that question: how old are you, how old do you want to be when you retire, what will your fixed costs look like at that age, will you have dependents, what standard of living would you like to keep up etc. This is a slippery slope and a quick web search will bring you to a million different calculators. One thing is for sure, it is likely more than you thought. That’s why the most important part of this whole post is this simple fact: The earlier you start saving SOMETHING, you will be exponentially better off later on. So, start with what you can but start now.