Many people who are visiting One Smart Dollar will have already taken the steps to set up a savings plan. But there are always those who need encouragement, and there are often new readers that have yet to see just how easy it is to start saving. There is a right way to design a savings plan, and there is a wrong way. Take a few minutes now to sit down and make sure you are doing it the right way.
The first step to saving money is to know your income. You can find this out pretty easily by looking to see how much is in each paycheck. To determine what you can save, you want to know your take home pay. So after all your deductions, including taxes, insurance and even 401k contributions (which you should be putting at least the company match and working your way up to the maximum allowable amount), jot down how much money you get to take home every payday.
How much are your regular bills? This means car insurance, loan payments, rent, average food costs, and basically everything else that is needed to live. This does not include nights out at the bar, entertainment, or your clothing budget. What you are doing is creating a very basic budget that shows income in, and expenses out.
Subtract your expenditures from your income. What you have left is your discretionary income. This is money that you can “play” with if you choose, but because you want to make sure you are well prepared in your financial life you will set aside only a certain portion that will be for entertainment. Now comes the important part.
If you have a 401k but not an emergency fund, determine how much you are able to save each month, and have all of it automatically deposited into your emergency fund a few days after your paycheck clears. Do this until your emergency fund has at least 6 months worth of living expenses stored up (you can do more or less, but 6 months is a good number that will make you well prepared for emergencies). If you do not have a 401k through work, take half your savings and direct it toward your IRA, the other half toward the emergency fund.
The key to developing a proper savings plan is to make sure to pay yourself first. 401k contributions are taken out of your paycheck and you never see the money. Setting up automation allows you to contribute to your savings and IRA before you really see the money. After that the bills are paid if there is money left over, that is what you get to play with for the month. A great number of people claim they will simply go in and look at their bank accounts and move the money to savings and they will have the discipline to do so every two weeks. Those people last about 2 weeks, the really disciplined ones might last a few months. Automation is your ticket to saving enough, living a rich life, and retiring without any needs.
How much are you putting away into savings each month?
Setting and forgetting is the absolute best plan to save money and not be tempted by it. This is why I also save in my 401k and have an automated savings deduction from my checking account that goes to a separate savings.
I actually don’t know the dollar amount but it is a big chunk of money… more than most my age is my answer.
Savings? Not much. Unless you count IRA, then $400/month.