How much money you should save depends on 3 things

How much money you should save depends on 3 things

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If you don't know how to save money, start with identifying your goals.

  • We're all told to save money, but we're not always taught how to save money - or better yet, how much money to save to accomplish our personal goals. 
  • Most financial experts recommend saving 20% to 30% of your income, if you can afford it.
  • But that may not be the amount you need to meet your own financial goals, like buying a house in your dream neighborhood or retiring early.
  • Financial planner Eric Roberge says tailoring your savings rate depends on three things: How much your goals cost, how much your ideal lifestyle costs, and when you need the money. 

At one time or another, we're all told to save money, but we're not always taught how to save money - or better yet, how much to save to accomplish our personal goals. 

There's a rule of thumb most financial experts recommend: If you can afford it, earmark 20% to 30% of your income for savings and paying off debt. But that won't apply to everyone. 

In a recent tweet, Eric Roberge, a certified financial planner and the founder of Beyond Your Hammock, said three things can help determine the level of savings that's right for you:

  • How much your goals cost
  • How much it takes to fund your ideal lifestyle
  • The timeline between now and when you need the money

How much your goals cost

The first step is identifying your goals. They can include paying off debt, creating an emergency fund, buying a house, having kids, establishing a college or private school fund for your kids, taking time off work to travel, retiring early, or any other life milestone that will cost money to achieve. 



"This might be self-explanatory, but the more your goals cost, the more you need to save for them," Roberge told Business Insider. "What's less obvious is the flipside: If your goals are less expensive, you don't necessarily need to save huge amounts of money."

Read more: I doubled my savings in 2018 and it took only 5 minutes of effort

Once you have a list of those goals, you can work backwards to figure out how much they'll cost. For instance, buying a house around $400,000 with 10% down - higher than the typical first-time buyer's down payment, but lower than the standard 20% - will require $40,000 up front.

But, Roberge warns, "We want to be careful not to overfund goals and end up with money that doesn't have a purpose; instead of over-saving, you may be able to enjoy that money a little bit more today."


How much your ideal lifestyle costs

Now it's time to figure out how much money you need to support your everyday expenses, both necessary and discretionary, Roberge said. If you enjoy eating dinner out most nights or love to get your hands on the latest Apple products, it's important to factor that in. 

Read more: I saved over $1,500 this year brown-bagging my lunch, but the benefits go beyond money

Ultimately, you're painting a picture of your ideal lifestyle. What does that look like to you, and most importantly, how much money will you need to maintain it? 


"If you live very modestly and are genuinely happy with that and plan to continue to live that way throughout your life, you may be OK saving 10% to 20% of your income," Roberge said. "If, however, you need $100,000-plus per year to fund your lifestyle, you better be saving serious amounts of money so you can sustain that into the future, and into a time where you may not earn a paycheck to cover those expenses."


When you need the money

The final step is prioritizing your goals and creating a timeline. Figure out when you'd ideally like to accomplish them - your age can be used as a simple guidepost - and break down the cost of getting there into smaller chunks.

Here's an example, using a formula created by early retiree and self-made millionaire Grant Sabatier, as explained in his book "Financial Freedom": A 30-year-old who wants to retire at 55 with $1.25 million in the bank will need to save about $1,647 a month. That assumes the money saved is invested and earns a conservative 7% annual rate of return.

"The element of time comes into play big-time with investing, because the longer your time horizon the less you have to save on a monthly basis," Roberge said. For shorter-term goals, he said, "you may need to save more aggressively because you can't rely on that money to make money."

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