For shorter term goals, the answer is: Math.
For longer term goals, the answer is: You don’t.
Financial planning is all about using a limited resource (money) to support unlimited needs (all the stuff you want to have and do). Well, it’s really all about behavioral change, just not in this blog post.
The Closer You Are to What You’re Saving For, the Better You Know How Much to Save
I don’t think a discussion of “saving enough” is complete without a notion of what we should be saving for. Though personal situations definitely influence this, the priorities of savings usually boil down to:
- Emergency fund (cash cushion)
- Retirement
- Everything else is debatable.
“Now” Goals
Everyone’s “now” savings goal is an Emergency Fund. In a volatile industry like tech, at least 6 months’ worth of basic expenses should be in your EF. If your rent/mortgage, loan payments, food, childcare and other unavoidable expenses are $5000/mo, then you want $30,000. (I say it so blithely!)
How soon you build up that fund isn’t written in stone, but sooner is better than later. So, if you’re saving $30,000/24 months = $1250/month, you can reach that level in two years from scratch. And even sooner if you already have some saved.
You might also have some “very soon” plans, like a downpayment on a home, a big vacation in two years, or a wedding, or a sabbatical from work. If you’re saving for a downpayment for a house purchase next year, then you pretty well know how much you need. Divide that by the number of months between now and then, and voila! A nice, specific, and pretty darn reliable number telling you how much you need to save each month.
So, see? Math. Not saying it’s easy to do, but it is easy to calculate.
Versus “Then” Goals
One the “then” end of the timeline is retirement. For those of you in your 30s and 20s, this probably inspires a “Really? Retirement feels like some fantastical future I’ll never reach.” Which is basically my point. That life is soooo far away that not only can your emotional mind not grok it, but any sort of specific mathematical projection is almost guaranteed to be off the mark. And it is guaranteed to be unreliable, even if it ends up being right.
How Much to Save for those Impossibly Far Away Goals
If your goals are decades away, then relying on rules of thumb is a good idea.
Using Rules of Thumb
Importantly, a rule of thumb simplifies the thought process, and you’d better believe that’s important. The more you have to think about something, the more likely you are to encounter “analysis paralysis” and do nothing.
For retirement, the rule of thumb has long been: Start saving 15% of your total income in your 20s. Here’s one (of many) articles about how much money you should have saved for retirement at every age. If you’re not yet there, then you should ideally ramp up your savings rate. And here’s one (of many) retirement calculators that will tell you how much money you should be saving.
Again, these are all approximations, using so many assumptions about investment returns and inflation and your future spending needs that it’s bound to be wrong. But you know what? At a three-decades remove, ain’t nothing else going to be better.
Check Regularly
If you’re 35, say, and and one of those retirement calculators tells you that you’re more or less on track for retirement, great! But you’re not done. So much can change over the course of a few years (do you now have children? did you have a windfall that you saved away? Do you have lower/higher income now so you’ve been saving less/more?) that a 5-year-old analysis is meaningless.
So, for those far-away goals, a key part of “saving enough” is to check in regularly. If you’re 35, and wondering about retirement, I’d say probably every 5 years or so is a reasonable frequency. The closer you get to the goal, the more frequently you need to check in. Also as you get closer to the goal, your check-ins—be they with pen and paper, an online calculator, or a financial planner—will transition more and more from “not-reasonable guesswork” to “meaningful estimates.” In the parlance of this blog post, it’ll transition from “You don’t know” to “math.”
Sometimes Saving Enough Simply Isn’t a Reality. Yet.
If you’re childless, making good money, and you don’t have expensive habits, then saving more might be pretty easy for you. Yeah! If you’re saddled with a lot of student debt, or you’ve got kids in daycare, or you’re taking care of an elderly parent, then yeah, saving more might simply not happen. Yet.
Life, if you haven’t noticed, unfolds in stages. Some stages make it easier to save; some don’t. Recognize what stage you’re in, and go easy on yourself if you’re in a “not so easy” stage.
I must warn you however! The biggest danger to going easy on yourself in the “not so easy” stages is that you might still go easy on yourself in the “easier” stages, when in fact you’re supposed to doubling down on savings. It takes forethought and effort to shift from “not saving enough” to “saving enough because now I have the money to actually do it.”
Even More Important than Knowing How Much to Save? Actually Saving.
Okay, so maybe we will get into the behavioral aspects of personal finance after all. Because you can read financial articles written by amazing, witty female financial planners who live in the Pacific Northwest all day long, and STILL not be any better off financially. Crazy.
The book Switch: How to Change Things When Change Is Hard tells us that the ability to change our behavior relies on motivating both our inner Elephant (unrelated to our Inner Monkey, I swear; this is our emotional self, who operates by habit, and is loathe to change direction) and our inner Rider (our rational self who might like the idea of change because it makes sense, but who tires easily when having to battle our Elephant or when asked to make too many decisions). We also need to make the Path easy to tread, which is to say, set up our environment to make these changes as easy as possible.
All the information thus far in this blog post appeals to your Rider. Math! Percentages! Planning! Let me assure you, your Elephant ain’t got no truck with it at this point. And that’s a problem. You need to not only know how much to save, but feel truly motivated to do it, and make the path to saving as clear as possible.
Question: What are you worried you’re not saving enough for?
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