It’s never too soon to start putting money away for retirement. The earlier you start saving, the more time you have to harness the power of compound interest, which means a little saving today can lead to a lot of cash down the road.
But how much should you be saving? Many people follow the 50/30/20 rule. According to this rule, you should reserve 50 percent of your after-tax pay for essentials like rent, utilities, food, transportation, insurance, and loan payments; 30 percent for personal, discretionary spending; and 20 percent for savings and debt repayments.
If you're wondering how to break down that 20 percent you’re saving, here are a few safe bets:
1. START AN EMERGENCY FUND.
Many personal finance experts will recommend stashing away three to six months’ worth of expenses in a savings account. That way you’ll have cash on hand in case you lose your job, need to repair your home, or have to fix your car. Calculate your monthly cost of living (minus luxuries like a premium cable package that you can cut in a pinch) and divide that number in half. If you can save that amount monthly, you will have a six-month emergency fund saved within a year.
2. START CONTRIBUTING TO A 401K.
Ideally your company will offer a 401k plan that you can easily enroll in. But if you do not have the option to enroll in a company 401k, you need to open an individual retirement account with your first paycheck. Again, time is the name of the game here. The sooner you start earning interest, the sooner that interest starts earning interest. You should aim to save at least 10 to 15 percent of your pre-tax income in your 401k. That may sound daunting, but if your employer matches your contribution, you only need to save 5 percent, which, with your company’s match, gets you to 10 percent. More is more here, so if you feel comfortable saving more than 10 to 15 percent, you should.
3. MAKE EXTRA PAYMENTS ON LOANS OR DEBTS
Whatever your other saving and spending plans entail, you should be making at least minimum monthly payments on your credit card and student loans. In fact, if you find you have some extra funds floating around, you can go ahead and make additional payments to reduce your debt faster. For example, you could use your tax refund or an annual bonus to help reduce your debt.
Remember, every person’s finances are different. The 50/30/20 rule is just a guideline, so don’t panic if you cannot get your budget to match it. Do the best you can, but do your best to start saving for retirement as early as you can.
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