Do You Save on a Monthly Basis?
If the answer is no, there are two sides of the equation to consider: income and expenses.
First, tackle the expenses. Is there anything you can cut? Whether it’s reducing how often you eat out or downgrading your vehicle, everything needs to be evaluated. Think of it like cleaning out a cluttered closet – sometimes you find things you didn’t even realize you had! Cutting unnecessary expenses can free up funds for investments or savings.
Second, look at the income component. Is there a way to generate more income? This could mean taking on a second job, finding a side gig, or gaining additional skills to earn a promotion. Working towards increasing your income is always a good goal. Ideally, you want to find ways to make money smarter, not harder. This means less trading of your time for money and more earning per hour or even generating passive income.
What Do I Need to Save For?
- Emergency Fund: Your first goal should be creating an emergency fund. For a deeper dive into this, check out resources on building an emergency fund.
- Debt Repayment: Once your emergency fund is established, focus on clearing up debts, especially unsecured debt like credit cards, car loans, and appliance financing. Mortgage debt can be tackled later.
- Retirement Savings: After debts are paid off, start piling cash into your retirement accounts. Maximize your 401(k) contributions, especially if you’re a W-2 earner, as this can also help reduce your tax liabilities.
- Other Investments: Anything in excess of your retirement contributions should go towards other investments or savings goals, such as a 529 college savings plan or saving for big-ticket items you want to pay for in cash.
How Much Do I Need to Save?
- Emergency Fund: This should consist of 3 to 6 months’ worth of your expenses.
- Debt Repayment: Try to tackle your debts from smallest to largest. This method, known as the snowball effect, helps you build momentum as you pay off each debt.
- Retirement Contributions: As of 2024, the maximum contribution to a 401(k) is $23,000, and the maximum IRA contribution is $7,000.
- Additional Savings: The amount you need will vary depending on your goals and purposes.
How Long Do I Need to Save?
For most people, saving is a lifetime effort. Life is full of unexpected surprises, but the more you save, the better prepared you’ll be to handle them. According to the FIRE (Financial Independence, Retire Early) movement, you need 25 times your annual cost of living to consider retiring early.
Saving is like exercising a muscle. It takes time to build the habit and get used to it, and then you need to maintain it. It’s a part of life – a sometimes tedious, but always rewarding, part of life.
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