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Deciding How Much to Save | Credit Union | Needham | MA 04/20/2016

When it comes to saving, something is better than nothing, and more is better than less. That's not much help—but this simple guideline might be:

• 50% of your after-tax income goes to needs
• 20% goes to savings and debt repayment
• 30% is for wants

This streamlined budget guide, comes from the book "All Your Worth: The Ultimate Lifetime Money Plan," by Elizabeth Warren and Amelia Warren Tyagi.

Warren and Tyagi categorize the terms this way:

• Needs are those expenses you must pay: housing, food, utilities, transportation costs, insurance.
• Wants are flexible expenses: cable television, restaurant meals, concert tickets, crafts and hobbies, clothing beyond the basics.
• Savings accounts for money left after you take care of wants and needs. It includes what you set aside for the future as well as any debt payments outside of a mortgage or car.

This is a good starting point, although in practice it's a better plan to pay yourself first. Automate your savings by setting up direct deposit of your paycheck and then automated transfers from checking to savings.

The authors say when your money is in balance, you always have enough to pay your bills, have some fun, and save for your goals. And once your money is in balance, you can stop worrying about it. Managing your money becomes automatic.

Live below your means and you will always feel rich.

If you're starting from zero, be realistic and don't expect to hit 20% savings with your next payday. But make progress toward that goal and be consistent. You are striving for a money plan that is sustainable:

• Organize your savings around short-term, medium-term, and long-term goals. In the near future, for example, you might be planning a family vacation. Within the next few years, you might want to establish a solid emergency fund equal to three to eight months' living expenses. Long term, you want to secure your retirement or perhaps help a child with college expenses.
• If your company offers a 401(k) plan, max out your contributions, or at least meet the company match. Because you make this contribution before taxes are deducted, you won't be giving up so much of your take-home pay. Warren and other retirement advisers recommend putting 10% of take-home pay—half of the 20% savings slice—toward your retirement.
• Once you decide how much to save, exploit opportunities to find more money to put toward your goals—you get a raise or a bonus, you get a tax refund, you pay off a debt, you have a garage sale. Keep your goals in mind to help your savings grow with consistent and automated effort.