First, nobody gets to retirement and complains: “Whoa, I have too much money! How am I going to spend it all?” You can never save too much money, yet many people save less than they need.  

Saving money for retirement is not a matter of how much, but how long you have been saving. Investing is a recipe with only three ingredients:

Money + Time + Knowledge

The more time you have, the less money you need. The less time you have, the more money you will need to reach the desired outcome. If you do not apply well-informed, judicious decision-making along the way, you may also fall short of your desired outcome.

When Should I Start Saving?

Now! If you are very young (ages 18-35), try saving at least 3 – 5% from your paycheck into a pre-tax 401K, 403(b), or 457(b) Savings Plan. If you are working for an employer who matches your contributions, try getting your contribution to at least the maximum matched level.  

If your employer does not offer a pre-tax savings plan, use a Traditional IRA and take a deduction for your contribution from your taxes.  Or, if your earnings are in a lower tax bracket, use an after-tax ROTH IRA. You won’t get a deduction for your taxes immediately, but after age 59.5 you can withdraw both your own contributions and the profits you’ve made on those contributions completely tax free. If you do this consistently from a very young age, you will have no need to infuse huge sums later in life.

I’m Finally Making Enough to Save Some Money, but I am over the Age of 35. Any Tips for Me?

If you did not get started before age 35, you may have to set aside more money to achieve the same result as someone who started very young.  Because you have not developed the habit of saving, it may also be harder to start saving at ages over 35.  Start small, like 3-5% of pre-tax pay, but once you get used to the low savings rate, steadily increase your deferral percentage until you are between 8 – 10%. Challenge yourself to do even more once you get used to 10%, because you need to make up for lost time.

Sometimes people develop the savings habit before they develop an understanding of how investments work during different economic cycles. You owe it to the retiree you will one day be to either take the time to learn how to invest, or to hire investment expertise.

How Much Should You Have in Your Emergency Cash Reserve?

If you put 50 financial experts in a room, you would get 50 different answers to this question. I will be expert 51 and offer you mine: You decide the amount that is right for your family. Ideally, your emergency reserve should be equal to the GREATER of three months of living expenses or $5,000 per family member in your household.

Your emergency cash reserve should be in a fully accessible money market fund at your bank or credit union.  Please DO NOT USE Certificates of Deposit (CDs) as these are not liquid, which means you may not be able to cash out when you need the money. 

If you are meticulous in calculating your budget, you know exactly how much you need each month and you can easily figure your cash reserve needs by multiplying that amount by three.  Should that amount prove to be less than $5,000 per family member, challenge yourself to get the extra savings into your cash reserve, because a little extra cannot hurt.  

If you are like the vast majority of the population, you hate budgeting.  You may not maintain a check register. So, the $5000 per person guideline can help.  I chose $5,000 per person as a minimum number.  Five is an easy number to multiply and divide, and the easier we make the target, the more likely you will hit it.

What Constitutes an Emergency?

This may best be answered by telling you what does not constitute an emergency:  boat purchases (unless you fish for a living), designer clothing (unless this is REQUIRED attire in your profession), and anything else you want more than need.

Let’s get serious. Every family has little emergencies throughout the year—unexpected expenses. Children outgrow clothes and shoes so fast that you may find yourself a little short for the credit card bills at the end of the month. Borrow a little from your emergency fund to pay off that credit card in full, rather than carrying a balance on the card. You would pay much more in interest over the years on the unpaid balance, than you would if you just used your emergency fund to save yourself the grief. Just remember to pay back your emergency fund over the rest of the year.

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