How much money should you save from your gross income? If you're wondering how to answer this question, LoveToKnow Save is here to help.
How Much Money Should You Save from Your Gross Income?: A Brief Overview
When it comes to how much money you should be saving, experts often cite the following figures:
- At least 10 percent of your take home pay
- Enough to keep three-to-six months of living expenses in an emergency fund
As for retirement, you can figure out how much money to save by using an online retirement savings calculator that takes into account variables such as your age, income, anticipated retirement age, expected inflation, and investment returns. On a similar note, there are also college savings calculators that estimate how much money you'll need to put away for a child's future educational expenses.
Factors Affecting Savings Rates
Keep in mind that the answer to the question, "How much money should you save from your gross income?" is highly personal. You may want to adjust your savings goals based on a number of factors. For example:
- The stability of your job. If you work in a volatile industry or are self-employed, you may need more emergency savings to be financially secure.
- The number of dependents you have. If you are supporting children, a non-working spouse, or an elderly parent, you may need to save a higher percentage of your gross income to cover all of your expenses.
- Your financial goals. If you dream of retiring early or traveling around the world, you'll need extra money saved each month to help accomplish these goals.
How to Start Saving Money
Once you've decided how much money you need to save, how do you reach your goal? While it's not easy to save money when you feel like your budget is already stretched to the max, it can be done. Here are three ideas to consider:
- Arrange to have a percentage of your paycheck automatically transferred into a savings account. If you never see the money to begin with, you won't miss it.
- Cut one excess expense from your budget, such as a Netflix subscription or the cost of daily newspaper delivery, then deposit that money into your savings account.
- Start clipping coupons to save money on groceries. Request your savings in cash, then deposit the extra money into a separate account.
Keep in mind that you don't necessarily need to save a large amount of money each month for it to be worth your time. Even if you can only manage to save $100 a month, you'll still have $1,200 by the end of the year. If you invest the money at the end of the year, that's enough to keep you on the path towards a more financially secure life for you and your family.
Should You Save or Pay Off Debt?
When discussing how much money you should save from your gross income, you may wonder whether it's better to save money or to pay off old debts. The answer to this question depends on the type of debt you have.
Credit card debt, because it's typically at a high interest rate, should be paid off first. The only exception to this rule is if you work at a job with a 401(k) plan that matches contributions up to a certain level. In this case, you should take advantage of the opportunity to save because you're getting a 100 percent return on your investment.
Debt from a mortgage isn't as bad as most other kinds of debt, since the interest is tax deductible. Qualifying interest on student loans is also tax deductible, making this another type of debt that should be fairly low on your repayment priority list.