When you have all your current expenses, needs and wants comfortably in your budget, you may be tempted to stop there. You may even have an emergency fund in place. And that’s all great! But don’t stop there. When you have your needs covered and your emergency funds (both your $1000 in cash and your 3-12 months income backup) in place, its time to really start saving for future needs. Your two biggest needs are typically a down-payment on a house and your retirement. If you don’t have a car savings in place yet, you’ll want to strongly consider that too.
Buying a house with a mortgage is a great move in many situations, but not all. If you don’t anticipate moving often, buying a house will help you build equity, inflation proof a large part of your budget, and set you up for very low living costs once your mortgage is paid off. And all this for not too much more than the cost of rent. However, while you can take out a mortgage with 0% down, these loans usually come with extra costs- most significantly PMI, an insurance product that protects lenders in the case of default. It is also harder qualifying for mortgage in these cases. Instead, saving the 20% down makes the mortgage more affordable.
While buying a house is prudent in many or most cases, you can still have stable finances while renting. Retirement savings, on the other hand, are non-negotiable. Don’t bank on Social Security. Even if it still exists when you retire, consider that a small supplement to your overall retirement plan. Also, don’t plan on working until your dying breath. Even if you love your job, in all likelihood, health issues and aging in general will eventually keep you from working full time. Regardless of your expectations for old age, it will be much easier to plan for the worst and end up with more than you need than running out of money when your earning potential is gone.
To help you figure out how much you should be savings, many investment services have retirement calculators on their website, such as this one at Vanguard
Unfortunately retirement is another area where Americans are critically unprepared. This article by Time Magazine explores just how bad the situation is. If you do fall in the 1 in 3 that don’t have anything saved for retirement, or the many more that have under-saved, ignoring the problem will only make things worse. The sooner you start saving and investing those savings, the more you can make compounding investment returns work for you, and the less you need to set aside each month. Don’t wait til the future to start planning for the future.
While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.