How Much Should You Actually Be Saving?

You must save, you need to save, have you started saving, you should save more.  With so many opinions on saving, it can be hard (between the deep web and unsolicited advice from family and friends) to know whether you’re doing it right.

Everywhere you look, there seem to be reminders that you should be saving. Yet, it is often hard to figure out exactly how much you should be saving. Are you saving too much, or too little? How should you decided how much to how save? All these are questions that many people, myself included, struggle to answer.

In fact, a study found that nearly 70% of Americans have less than $1,000 in a savings account. Of these, 45% have absolutely nothing in their savings account.

Clearly saving is something that we all should be doing. Here are a few tips to help you avoid saving too much, or too little.

Let’s Talk About Saving Too Much

Believe it or not, there are some people who are save too much. According to a recent study, a lot of people who save more than necessary do so because of some fears. For many, it is the fear of running out of money, which stems from the lack of a financial safety net in childhood. If you have parents who lost their jobs, you watched your parents struggle financially, maybe you or your parents are buried in student loans, you’re probably very prudent about money. Because of these fears, it is easy to be fearful of following in the same footsteps.

A good way to gauge whether you’re saving too much is if you are afraid to spend money on some basic essentials. For example, are you scared of spending money on fresh fruits and vegetables because they’re more expensive, and so you start buying the cheapest foods? While doing this might save you a few extra dollars, in the long run, buying low quality foods can create health problems such as diabetes.

Or maybe you’re afraid to get medical attention when you need it because of the out of pocket costs? While it is good to be prudent, nickel and diming your health could result in greater financial cost to you as an untreated minor illness develops into something bigger.

Remember, having a fear of “I’m never going to have enough,” can spill in many other aspects of your life, resulting in you missing out on important moments for fear of spending money. So yes, while it is good to save, make sure you have a healthy view of the money you’re saving.

But what if you think you’re saving too little, what then? Here are some tips on how to correct your behavior.

Can You Pay More Than The Minimum Credit Card Balance?

Are you able to pay more than the minimum credit bill amount month after month? If not, you’re overspending and most likely headed towards credit card debt, where meeting any savings goal will be much harder.

To avoid this, divert some money from other parts of your budget or cut back on spending to free up cash to pay more than the minimum. If you have credit card debt, the best thing you can do for yourself is to work towards eliminating it as soon as possible. The longer you wait to pay it down, the more you’ll owe, no thanks to compound interest.

Do You Have An Emergency Fund?

Having an emergency fund is one of the most important steps you can take with your money and should be a top priority, unless you have credit card debt.

If you haven’t established a rainy-day fund, chances are you aren’t saving enough. But don’t despair, it is not too late. First, you will have to create an emergency fund as soon as possible. Make sure you’re storing it in the right place, too. A high-yield savings or money market account is a good starting point where the money can grow, earning as much as 1.10% or more in interest and be there when you need it.

Have You Started Investing?

Investing is perhaps the best and most effective way to start building wealth. The earlier you start, the better off you’ll be, thanks to the power of compound interest. Do you have any money to invest? If you feel like you don’t, then you’re probably not saving enough.

An easy way to start investing is by researching low-cost index funds. In fact, low-cost index funds are Warren Buffet’s and financial planners’ top recommendation for young investors. You can invest in index funds through a brokerage firm or robo-advisors such as Betterment, Wealthfront or Ellevest.

Can You Afford All Your Bills Every Month?

What happens each month when you have to pay your bills? Are you living paycheck to paycheck or are you able to pay the bills without any trouble? Being barely able to cover bills every month makes it nearly impossible to build up significant savings.

In order to start saving more, you have two options, either earn more money or spend less. If you want to earn more, you can consider some lifestyle changes to make, steps to negotiate a raise, or ways to make extra cash while maintaining your day job.

If you opt to spend less, to start, you might want to think about reducing your largest costs, like your rent, transportation, or food spending.

You Tell Yourself You’ll Start Saving When You Start Earning More

The idea that you’re not saving because you don’t earn enough and that everything will change once your payslip rises is completely false. How you manage $100 is likely how you’ll manage $100,000. It’s not about getting more money, it is about being disciplined with what you have.

Don’t wait until the new year, after graduation, for a birthday, or when a tax refund arrives in the mail to start saving. Think of your savings as a fixed cost, something you pay every month. Setting up an automatic transfer to your savings account is very effective way to start saving. By doing this, you won’t even have to think about it and you’ll learn to live without the money.

Don’t Forget To Build Flexibility Into Your Budget

Throughout the year, there will be surprises in your spending. The most likely surprises are medical expenses, but there could be others from time to time. You need to expect surprises and have room for them in your budget.

Second, review your budget regularly. See how your actual spending matches the estimates. Then make adjustments. If you make annual reviews and adjustments, they are likely to be small. But if you have several years between reviews, the adjustments you have to make could be substantial.

Lastly, if you think you’re saving too much, make a list of at least 10 things, that you would like to do, to see, to buy, to visit, or otherwise accomplish in a year, or whatever specific time frame you give yourself.

For each item, estimate how much it would cost, and whether it is a one-time expense or an expense which extends over more than one year.

Then you need to prepare a year-by-year financial projection, accounting for all income and investments, and worst-case scenarios.

The bucket list is an important concept. It shouldn’t be trivialized, especially when there’s money sitting on the side.

So, what are you waiting for? Go ahead and start saving or adjust how you save. But remember to have a bit of fun along the way because money is meant to be enjoyed!