This article provides a guide on where to save money for three major goals: pension, college, and financial emergency. However, the methods it outlines can be used to achieve a variety of other objectives, including starting your own business, saving for a down payment for a home, an ideal trip, or a new car.
But before you start, it's important to consider any unpaid debts you may have. Paying 17 percent interest on credit card debt while earning 1 percent (or even less in some situations) on a savings account sounds odd. So think about tackling the two together by putting some funds into savings and others to your credit card balances. You will need to increase your savings contribution sooner if you can pay off that loan with a high-interest rate.
How to Save Money for Your Main Financial Goals
Building Emergency Savings
Most people and families should aim to have an emergency fund big enough to cover significant, unexpected expenses, such as a pricey auto repair, a hefty medical bill, or both. If you lose your job and need to look for a new one, an emergency fund can help you get by for a while.
How Much Should You Save?
Your take-home pay, which may be easily accessed on your paycheck stubs or bank statements, is a close estimate of your monthly living costs unless you are already a large saver. Financial advisors often advise saving at least three months' worth of living costs. Others recommend saving anywhere from six months' worth of costs to a full year's worth.
These numbers also apply to pensioners. However, it's wise to perform a few additional calculations. Compare your monthly income, which includes Social Security, pensions, liquid assets, and investment income, to all of your monthly expenses. In a bear market, you should also take into account the danger involved with any stocks and other risky assets you may have.
Funding Your Account
If you make money outside of your regular income, you might want to use some or all of it. That might be money from a tax refund, a bonus, or a side job. Try to add at least a portion of any raise you get to your account as well.
Paying yourself first is another well-known piece of advice. This involves treating your savings account like any other expense and paying a specific portion of each paycheck to it. Consider direct deposit if you want to avoid the need to spend the money right away. However, you might have the money placed into your checking account and then automatically transferred to your emergency fund.
Saving for Retirement
For many of us, saving for retirement is our top savings priority. But the task can be onerous. Thankfully, there are a number of wise methods to save money, and many of them come with tax benefits as an additional incentive. These include individual retirement accounts (IRAs), 403(b) plans for employees of nonprofit organizations and schools and 401(k) plans for those working in the private sector.
Employer-Sponsored Plans
Through an employer plan, such as a 401(k), planning for retirement is the simplest, most automated way to do so (k). The money automatically pays back from your paycheck and is invested in the mutual funds or other options you have selected.
Until you ultimately withdraw the funds, you are not required to pay income tax on the money, the interest, or any dividends your plan gets. You can add up to $19,500 (increasing to $20,500 for 2022) yearly to a 401(k) plan in 2021.
You are allowed to donate an additional $6,500 if you are over 50.
Many businesses will match your payments up to a specific amount as an additional incentive. For instance, if your employer's contribution an additional 50%, a $10,000 investment you make will now be worth $15,000.
The table that follows shows how compounded affects retirement savings is based on the premise that you invest a maximum of $19,500 annually and are assured a five percent return on the investment.
| Year | Total Amount Contributed | Year-End Value |
| 1 | $19,500 | $20,475.00 |
| 2 | $39,000 | $41,973.75 |
| 3 | $58,500 | $64,547.44 |
| 4 | $78,000 | $88,249.81 |
| 5 | $117,000 | $139,269.16 |
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