What's a good savings goal?

What's a Good Savings💡 Definition:Frugality is the practice of mindful spending to save money and achieve financial goals. Goal?

Setting a savings goal can feel overwhelming, especially when considering the myriad factors that influence your financial needs. Whether you're aiming to build an emergency fund or preparing for retirement💡 Definition:Retirement is the planned cessation of work, allowing you to enjoy life without financial stress., understanding how to set and adjust your savings targets is crucial. With this guide, we'll explore recommended savings benchmarks, provide practical examples, and help you tailor these goals to your unique circumstances.

Understanding Savings Benchmarks

When it comes to savings, benchmarks offer a useful starting point. These are generalized targets based on research and industry standards, but they should be adjusted to fit your personal situation.

Emergency Fund

An emergency fund is your first line of defense against unexpected expenses, such as medical emergencies or job loss. A common recommendation is to save 3–6 months of living expenses💡 Definition:Amount needed to maintain a standard of living. For a household with $5,000 in monthly expenses, this means aiming for $15,000–$30,000 in readily accessible funds.

Retirement Savings

For retirement, a frequently cited goal is to save 15% of your annual income💡 Definition:Income is the money you earn, essential for budgeting and financial planning., including any employer contributions. Fidelity and T. Rowe Price suggest saving multiples of your salary by certain ages:

• By age 35: 1x to 1.5x your salary
• By age 50: 3.5x to 5.5x your salary
• By age 60: 6x to 11x your salary

For a 35-year-old earning $70,000, this translates to a retirement savings goal of $70,000–$105,000.

The 💡 Definition:A budgeting strategy allocating 50% needs, 30% wants, and 20% savings for financial balance.50/30/20 Rule💡 Definition:A budgeting guideline allocating 50% to needs, 30% to wants, and 20% to savings

This popular budgeting framework suggests allocating your take-home pay💡 Definition:Net income after taxes and deductions as follows:

• 50% for needs (housing, groceries, utilities)
• 30% for wants (dining out, entertainment)
• 20% for savings and debt💡 Definition:A liability is a financial obligation that requires payment, impacting your net worth and cash flow. repayment

While this rule provides a balanced approach, adjustments may be necessary based on your financial priorities and lifestyle.

Real-World Scenarios

Let's consider a few practical examples to illustrate how these benchmarks apply:

1. A 55-year-old with $185,000 in retirement savings: This individual is at the median for their age group, according to the 2022 Survey of Consumer Finances. However, if they plan a lifestyle that exceeds the median, they may need to increase their savings rate💡 Definition:The savings rate is the percentage of income saved, crucial for building wealth and achieving financial goals..

2. Living in a high-cost area: If your local cost of living is 20% higher than the national average, you might need to save 20% more than standard benchmarks suggest to maintain the same level of financial security💡 Definition:Collateral is an asset pledged as security for a loan, reducing lender risk and enabling easier borrowing..

3. 💡 Definition:Savings buffer of 3-6 months of expenses for unexpected costs and financial security.Emergency savings💡 Definition:Savings buffer of 3-6 months of expenses for unexpected costs, including pet emergencies and medical crises. for a household with $5,000 in monthly expenses: Aim for an emergency fund between $15,000 and $30,000, ensuring these funds remain liquid and separate from investment accounts.

Common Mistakes and Considerations

When setting savings goals, it's important to be mindful of potential pitfalls:

• Underestimating Costs: Inflation💡 Definition:General increase in prices over time, reducing the purchasing power of your money., healthcare expenses💡 Definition:Healthcare costs refer to expenses for medical services, impacting budgets and financial planning., and regional cost-of-living differences can significantly affect your savings needs. Regularly review and adjust your goals to account for these factors.
• Neglecting Emergency Funds💡 Definition:Emergency liquidity is cash available for urgent needs, ensuring financial stability in crises.: Ensure your emergency savings are accessible and not tied up in long-term investments, which could delay access during an emergency.
• Relying Solely on National Averages: National savings averages can be misleading, especially in areas with a higher cost of living. Personalize your savings targets to reflect your unique circumstances.

Bottom Line

A good savings goal is one that aligns with your financial needs, lifestyle, and long-term objectives. Begin with established benchmarks, but don't hesitate to adjust them based on your situation. Prioritize building an emergency fund and saving consistently for retirement, and regularly review your progress to ensure you're on track. By taking these steps, you can build a robust financial foundation that supports your future aspirations.