Pssst! Wanna know a secret that will change your life?
The more money you save, the more peace and freedom you’ll have.The more money you save, the more peace and freedom you’ll have. Click To Tweet
These are scary statistics. I share them not to shame anyone, but to bring to light where we are as a nation. My hope is that this post will inspire you to change these patterns and help others do the same.
Welcome to Part III of my series on building the foundation for financial freedom. Earlier this year I asked my readers what they wanted more of and nearly everyone said they wanted to learn more about personal finance. I decided to write a series detailing how my husband, Jer and I, created financial freedom in our own lives.
What Will Saving Do For You?
I get it. Saving isn’t fun for most people.
Most things that are good for us aren’t considered fun, like exercising and eating lots of vegetables. That doesn’t mean we shouldn’t do them. Or that we won’t learn to enjoy them. The same goes for saving money.
Once you create the habit, you will love the sense of peace and freedom that saving brings to your life. In my opinion, there’s nothing I could ever buy that would feel as good as financial freedom feels. Here are some of my favorite benefits to saving money.
- You’ll feel less stressed knowing that you can deal with the unexpected without having to borrow money
- You’ll improve your marriage and family life by having fewer money fights and money problems.
- You’ll enjoy inner peace by never having to compromise your values to make ends meet.
- You’ll have the freedom to explore your interests and new career opportunities leading to a sense of fulfillment.
- You’ll find joy in giving generously and helping others help themselves.
- You’ll build a foundation to ensure you’re taken care of as you age and leave a legacy for your loved ones.
What would you like your savings to do for you? If there was one thing in your financial life you could change, what would that be? Why do you want to change that?There's nothing I could ever buy that would feel as good as financial freedom feels. Click To Tweet
What You Should Save For and How Much
As I mentioned in Part I and Part II, my husband and I do not use debt. I’ll spend more time on this in Part IV. For now, I’m going to share 4 categories where you should be saving if you want to live a debt free lifestyle.
1 – Emergencies
Emergencies happen. The more you prepare yourself, the less of an impact these unexpected expenses will have on your life. Depending on your personal situation, you will want to have 3 to 12 months of expenses available at all times.
If you completed Step 1, you should know how much your monthly expenses are. This money should be held in cash, in a savings or money market account, so that it can be accessed in case of an emergency. But not too accessible that you use it to buy that cute pair of shoes or a trip to Paris.
How much you need will vary per household. You should shoot for a minimum of 3 months. You will want to increase that amount depending on your situation. Consider factors such as health, employment status, and income streams when deciding how much your family needs.
2 – Retirement
There are a lot of opinions about how much you should save for retirement.
I’ve always heard that you should shoot for 10 times your annual income. Let’s say you make the national average of about $50,000 per year. That means your goal would be to save $500,000. If you were earning 8 percent and withdrawing $50,000 annually, your nest egg would last about 20 years.
Other personal finance gurus say the magic number is saving 15 percent of your annual income. Using the same $50,000 income example, you would save $7,500 each year. Let’s say you start saving at age 40 and plan to retire at age 70. You estimate that you’ll live 30 years in retirement and that you’ll earn an average 8 percent rate of return over those 60 years. That means you should plan on having about $2,300 monthly after taxes and inflation.
Both of these recommendations are a good start but they’re a bit low for my comfort level.
Like your emergency fund, it’s up to you to determine what level of retirement income you’ll need. Here are a few questions to consider.
What age are you starting?
Let’s say you want to have $1 Million by age 60. You estimate that you’ll earn an average return of 8% and see an average inflation rate of 3%. If you start at age 40, you’ll need to save $1,750 per month to hit your goal.
However, if you began saving at age 20, you only would need to put away $310 monthly. In this scenario, you would save $270,000 in deposits.The younger you start, the better. Click To Tweet
What is your expected rate of return?
In all of these examples, I use 8 percent because it’s very attainable. It is possible that a properly invested portfolio could earn over 10 percent. You can learn more about average rates of return here.
What are your fees and expenses?
If you can’t answer this question, you need to figure it out ASAP. Some company’s fees on retirement plans are a downright scam.
A number of years ago, Jer’s employer switched retirement plan providers. About a year in, I realized that their fees were eating up all of his earnings. Jer complained about it to HR every month until they switched providers. If you find yourself in a similar situation, I suggest you do the same.
Are you planning to retire? If so, when?
I don’t know that my husband and I will ever be fully retired. I imagine that we’ll always have something that we’re working on.
Don’t limit income ideas to J-O-Bs. Perhaps you’re planning to start a business. Or maybe you’ll have rental properties or book royalties. These streams of income will change how much your need to supplement during your golden years.
What if you were unable to work?
I envision a future where we’ll always have projects we want to work on. That doesn’t mean we’ll always be able to. A lot can happen over the course of our lives. Even if you plan to keep working, it’s good to have a backup plan.
How do you expect your lifestyle to change during retirement?
Your expenses today might not reflect what they will be in retirement. Many people retire overseas and enjoy lower expenses. Others choose to build their dream homes or travel and see their expenses increase. Think about what you want your life to look like and plan accordingly.
How long do you think you’ll live?
Assuming I don’t get hit by a car or die in some other tragic death, I expect that I’ll live well into my hundreds. Anyone my age and younger who takes care of themselves should expect a longer life as well. Technology is changing rapidly and there’s a good chance we’ll see big changes in life expectancy very soon.
Build in Some Margin
There will be inflation, and all investments that earn value can lose value just as quickly. We should also expect changes to the tax code and health care throughout the remainder of our lives.Build in a little margin for the unexpected. Click To Tweet
Figure it Out
Keeping these questions in mind, run your own scenarios using the calculators below. Income needs during retirement are different for everyone. Only you can determine how much you will need.
- How Long Will My Money Last
- How Much Do You Need to Retire
- Monthly Retirement Income Calculator
- How Long to Save a Million Dollars
- Compound Interest Calculator
3 – Other Large Ticket Items
As I mentioned in the introduction to this section, my husband and I don’t use debt. That means we pay cash for everything including home repairs, remodeling, vehicles, and vacations. I will dive deeper into this subject in a future post. For the time being, consider these expenses when creating your savings plan.
What large ticket items will you need to replace in the next 1 to 5 years?
4 – Children’s College and Education Expenses
We don’t have children, but most of my readers do. For us, no debt means no debt. If we had children, this would apply to their education expenses as well.
To learn more about going to college debt free, check out this post from The 7 Year Adventure.
Don’t Leave Money on the Table
There are a lot of excellent incentives available for savers. By choosing the right vehicle for your investments, you can maximize your savings.
This is by no means a comprehensive list. I’m sure there is more out there than I am aware of. Here are some of my favorite saving incentives.
This is the one account everyone should start today. It’s the one thing I wish I would have started sooner. Here’s why – every dollar you earn in a Roth IRA is tax-free!
There are two major benefits to an employer sponsored 401k. First, most employers match a certain percentage of what the employee contributes. If your employer matches up to $2500, you should contribute whatever it takes to get that $2500 of free money.
Additionally, 401k contributions are deducted pre-tax. This lowers your AGI (Adjusted Gross Income) and your potential tax rate.
Like our friend, the 401k, HSAs (Health Savings Accounts) also come out pre-tax, lowering your AGI and potential tax rate. There are no usage requirements and you also have the option to invest your savings in mutual funds.
529 College Savings Plan
If you are planning to help fund your children’s college, you definitely want to look into this. Like the Roth IRA, your money grows tax-free.
Savers Tax Credit
The Savers Tax Credit is available to households with AGIs less than $62,000. If you fall into this category, take full advantage of this tax credit that’s based on your AGI and the how much you save.
How to Make it Happen
For most people, this is the most difficult part. It requires discipline and the willingness to play the long game. Make it happen by following these tips.
Stop Procrastinating and Making Excuses
One of the most common reasons people aren’t saving for retirement is because they think they have time. But as I showed you earlier, compound interest favors the young.Compound interest favors the young. Click To Tweet
If you saved $1,000 per month from age 40 to 60 at an 8% rate of return, you would have close to $600,000. However, if you saved that same $1,000 per month from age 20 to 40, then stopped adding and continued to earn 8 %, you could have close to $3,000,000.
Review Your Budget to Find Categories to Cut
Even the leanest of budgets can find something to cut. What are you willing to sacrifice for more peace and freedom in your life? Could you stop eating out, cut impulse purchases, or start shopping garage sales and thrift stores?
Cutting your spending is one of the quickest ways to increase your savings rate.
Increase Your Income
The more you make, the more you can save. You could consider getting a new job that pays better or you could start your own side business. You could likely drum up a few thousand dollars selling all that stuff you don’t use that’s collecting dust in your basement. Get creative and give your savings an extra boost by increasing your income.
When Preparing Your Budget, Pay Yourself First
I talked about this is Part 2. After your basic needs are met, allocate whatever you can to pay yourself first. You work hard and deserve to reap the rewards.
It’s a lot easier to save money when you don’t see it. This is the beauty of 401k plans. The money comes out automatically and you never see it.
You can do the same thing on your own by setting up automatic transfers each pay period. This is a great way to set aside money for your Roth IRA, kids’ college, or next vehicle.
Know Your Why
I cover this in many of my posts and I’m going to cover it again. It’s that important.
If you don’t have a good reason for doing this, you probably won’t be that successful. Get to know the real gut-wrenching reason you’re working toward financial freedom. Then find creative ways to keep your why top of mind.
If you’re new to the idea of financial freedom, this probably feels overwhelming to you. Know that you don’t have to do everything at once. I included many different steps to accommodate readers who are in different stages on their journey to freedom.
Give yourself permission to pick one thing and focus on that. If you don’t have an emergency fund, start there. Once you have 3 months of expenses set aside, start setting aside money to fund a Roth IRA.
Applying intense focus to one thing at a time will change your financial future over the course of just a few short years.Intense focus on one thing at a time will change your financial future in a few short years. Click To Tweet
If you made it this far, congratulations! The posts in this series are longer than usual because there’s so much important information to cover. The fact that you made it here shows that you’re serious and ready to create your own financial freedom.
To give yourself a little jumpstart, I’d like to propose a challenge to you. Would you be willing to challenge yourself to save $500 over the next 30 days? To make it work, you’d only have to find $17 per day to cut or earn. Send me a message if you’d like me to follow up with you in 30 days. You owe it to yourself to give it a shot!
Ready to change your financial future?
Check out these posts to learn everything you need to know to go from surviving to thriving.
Step One – Figure Out Where Your Money Is Going
Step Two – Creating a Budget That Works For You
Step Three – Saving For Financial Freedom
Step Four – Ditch Your Debt
Step Five – Build Wealth on Any Income
Step Six – Achieving Your Goals As A Couple
Got questions? You’re not the only one. Ask in the comments below so others can benefit as well. Don’t be shy. We’re all in this together.
*Information contained in this post is for informational purposes only. Any advice that I give is my opinion and based on my own experience. You should always seek the advice of a professional before acting on something that I have recommended. By reading this series, you agree that myself and my company are not responsible for the success or failure of your decisions relating to any information presented on this website.
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