Savings play an important role in our lives. We use savings as a cushion to ease potential financial hardship and as a conduit to target financial goals like owning a home, funding education, and protecting your family. For many of us, it can be difficult to know how much savings to keep. Therefore, this article aims to provide a comprehensive overview of how much the average American should keep in their savings.
Savings Goals According to Your Life Stages
When determining how much you should keep in savings, it is important to consider your own unique situation in life. Different life stages often call for different savings goals.
If You’re Under 25
If you’re under 25, you may not have consistent income or even a job yet. The financial demands at this stage of life can be challenging and you may be focused more on the immediate rather than saving for the future.
According to financial advisors, the goal for this age group should be to have enough in savings for at least six months of living expenses. This will ensure you have enough money to cover unexpected expenses, such as medical bills and car repairs.
If You’re 25-35
If you’re between 25 and 35, you may have established some sort of stable income and job. This is a great time to get serious about saving. You should aim to save enough for both short-term and long-term goals.
For short-term goals (emergency funds), you should aim to have three to six months of living expenses saved. This will help you manage unexpected expenses. For long-term goals (retirement, home ownership, etc.), you should aim to save 10-25% of your income.
If You’re 35-45
Those in their mid-30s to mid-40s often have more demands on their financial resources. They may have to consider bills due to having children or higher education costs.
At this stage of life, your goal should be to save three to six months’ worth of expenses plus 10-25% of your income. This will ensure you have enough money to manage any unexpected expenses while also ensuring long-term financial security.
If You’re 45-55
If you’re between the ages of 45 and 55, you’re in the prime earning years of your life. During this time, you should focus on saving for your retirement.
It is recommended that 45 to 55 year-olds aim to save 15% of their income for retirement and have a rainy-day fund worth 6 months of living expenses saved up. If you’re unable to meet these goals, you should aim to save as much as you can.
If You’re 55 and Older
Once you hit 55, you are likely to be nearing retirement. You should be focusing on having enough money saved to cover all your retirement expenses.
Once you reach the age of 55, it is recommended that you have 10-12 months of expenses saved up. Then, focus on having at least two-thirds of your pre-retirement income saved for when you retire.
How to Accrue Savings
Once you’ve established how much you should be saving, it’s important to consider how to best accrue this money.
Emergency Funds
The foundation of every savings plan should be built with an emergency fund. This is a reserve of cash that you can use to get through unexpected expenses, such as car repairs or medical bills.
To build an emergency fund, it is recommended that you set aside a certain amount of each paycheck to go into the fund. Automating transfers into an online savings account is an easy and effective way to ensure you have a healthy emergency fund saved up.
401k and IRAs
Retirement plans, such as 401ks and IRAs, allow you to save for retirement in a tax-advantaged way. 401ks are employer-sponsored retirement plans, while IRAs are individual retirement plans that you open with a financial institution.
The amount you can contribute to a 401k or IRA depends on the plan and the contribution limits in place. However, you should aim to contribute as much as possible in order to maximize retirement savings.
High-Interest Savings Accounts
A high-interest savings account is a great place to store money in the short-term. The interest rate on these accounts is usually higher than a standard savings account, allowing you to accrue more money as you save.
There are many financial institutions that offer high-interest savings accounts. However, it’s important to shop around and read the fine print to make sure you’re getting the best deal.
Savings are key to achieving financial security and peace of mind. Knowing how much you should be saving, depending on your life stage, and accruing the money in a tax-advantaged way can be a great way to build a solid savings foundation.
These are just some recommended savings goals and strategies for the average American. Each person’s financial situation is different. Therefore, it’s important to consult a financial advisor to get tailored saving advice for your unique situation.
