Most people agree that saving is a good thing, but they find it difficult to do. Believe it or not, it IS possible to save for short-term and long-term goals, emergencies, and even retirement. The choice is up to you.
The 70-20-10 Rule
One easy way to save is to follow the 70-20-10 Rule. Divide your income in the following manner:
- 70% for living expenses (rent, food, clothing, gasoline)
- 20% for savings
- 10% for retirement (IRA, 401(k), company pension)
- 5% for emergencies (car repairs, medical expenses, unemployment)
- 5% for specific goals (vacation, car, school tuition, a new computer)
- 10% for debt (student loans, car payments, credit cards)
If you exceed these percentages in any category, reduce your spending in the other areas. For example, if you spend 75% of your income on living expenses, reduce the amount you put into your savings by 5%. If you want to put more money into your savings, you must reduce your living expenses and/or decrease your debt.
Ways to Save
Don't know where to start? Need ideas on new ways to save money. Check out these tips.
- Saving - Getting Started
- Reduce your Housing Budget
- Reduce your Household Expenses
- Reduce your Food Bill
- Reduce your Transportation Costs
- Reduce your Miscellaneous Expenses
- Pay yourself first by putting a portion of your paycheck directly into the bank. This is the most effective way to save money. If you never see the money, you won't miss it.
- Your emergency fund should consist of at least 3–6 months of living expenses.
Test Your Knowledge
Fred and Steve save $2,000 a year for retirement (at 9% interest). Fred saves from age 22 to age 31 (9 years). Steve saves from age 31 to age 65 (34 years).
Who has more money at retirement (age 65)?
Fred will. His account will grow to $579,504. Steve's account will only grow to $470,247. How can this be? Fred invested only $18,000, while Steve invested $70,000. The answer is compound interest. While Fred invested less money, he started 9 years sooner than Steve did. Steve's money didn't have enough time to grow.