In my last post, I wrote about ways to set some long and short-term goals for what you want your life to look like. Now, it’s time to put some numbers into getting there. Of course, we’ll also need to start prioritizing our goals along the way, since most of us have a finite supply of money.
For this part of our process, we’re not implementing any final numbers for our plan; we’re coming up some ideal numbers that will probably need some adjustments before we arrive at a starting point. Once we have our starting point, we can move on to how we are going to make adjustments to achieve our goals.
You may have also noticed that we haven’t looked at our income level, yet. The reason for this is that we’re still establishing some “ideal” amounts for what we are trying to do. Also, most people know how much money they make, and a certain level of reasonableness in this part of the plan will come from this. Nonetheless, I expect for most that these perfect giving, savings, and investment numbers will be higher than your income can take once we add in our regular spending amounts. That’s OK; we’ll fix that, later.
Part 1: Giving
I know you always hear that you should “pay yourself first,” but I like to think of giving as the first priority when it comes to my money. Not only, in my opinion, does giving lead you to make better decisions with your money in other areas, but this article from Greater Good Magazine highlights other benefits of giving from health benefits to greater social connections in your community.
If this is your first time setting up a financial plan, I would suggest a starting goal of 10% of your income for giving. If you are already giving 10% of your income away, you can either stay at that level or consider increasing your target.
If the idea of giving away your cash is a little intimidating to you, you’re not alone. It took me a long time to get to my goal. If your current situation doesn’t allow for a lot of cash giving, consider giving some of your time to a cause that’s important to you. I’ll touch on that, again, in another post.
Part 2: Emergency Fund
The second goal we are going to pursue is the emergency fund. An emergency fund is a savings account that will help you weather the occasional storm that occurs in life. What amount you set as a goal, here, depends on your level of income and whether you are paying off any high interest debt.
- If you are paying down debt: You may be familiar with Dave Ramsey’s baby step 1 where you save $1000 for a “starter emergency fund.” This has been the case, at least, since the early 2000s, so I like to start a little higher than that guideline.
Given the passage of time and Dave Ramsey’s $1000 recommendation, I would set my goal around $1500, and then work on a process to get the amount higher if you need to be a little more comfortable (up to around, say, $2500). This article from The Motley Fool cites a 2019 study by economists from The Federal Reserve Bank of St. Louis and the Universidad Diego Portales in Chile that found that an emergency fund of $2,467 reduced the chances of experiencing a significant financial hardship (with a range of $1,814 – $3,011).
What’s important here is that you set aside something, maybe 2%, and working toward getting to 10%, of your income for an emergency fund.
- If you are not paying down debt, then the consensus for an emergency fund is 3-6 months of income. I don’t know about you, but I think that saving 3 months of my income for an emergency fund is hard. Presently, I’ve been stuck between 1-2 months for some time. And, I’m saving about 10% of my pay to move toward my ultimate goal. Slow and steady wins the race, here.
Part 3: Saving for Retirement
The most common figure that is used as a target to save for retirement is to set aside 15% of your income. For a long time, I thought this seemed rather arbitrary, even though I knew it really wasn’t. The most common sources of this 15% number are Fidelity Investments and T. Rowe Price, and you may have heard this recommendation from Dave Ramsey, as well.
When you dig into the background, you can see why 15% is a good rule of thumb as you set up your financial plan.
According to this article, the basis of saving 15% of your income for retirement are as follows:
- The 15% value includes any employer matching.
- You will be saving consistently from age 25 to 67.
- Your starting savings rate will be around 6%, and you will gradually increase the percentage that you save.
- An annual return on your investments of around 7%.
- You will need to replace 70-80% of your income in retirement, and Social Security will replace some of that.
While not all of this will be true for you, 15% would seem to be a good initial target as an ideal savings rate. You can always adjust the final number as you go. As for me, I am in my mid-40s and currently saving around 20% of my income in this category.
At any rate, I will say you should get the most out of the employer match that you can as a starting point. My employer matches my contributions up to 5% of my pay, for example. Based on that company match, if I were starting out, I would contribute 5% and plan on increasing contributions 1% at a time each year as I got cost of living raises. There are also other retirement accounts available to you, such as IRAs (Roth and Traditional) to help you you bump up your retirment savings,
Part 4: Saving for other goals
I believe you should set some money aside to purchase some of your “wants” in addition to saving for retirement. This can be any amount you want, large or small, dollar amount or percentage of income. I am currently at 2% for this category and would like to increase that at some point.
For short-term goals, open a savings account or set up a bucket or vault in your existing savings account if that feature is available.
For long-term goals, you may want to mix in a taxable investment account to get some exposure to the stock market.
I’ll cover this in more detail in another post.
Part 5: Spending
Now that we have set long-term goals for the 4 categories above, we can look at how our current income and expenses work out and find out where our actual starting points are.
Next, I’ll go over how I estimate my monthly income so we can get started on the details of our financial plan. (Yes, I have a method.)
Thank you for visiting Finunciate. Come back, soon.