Dear Olga,
What percent should one put aside for savings every month? I have a 401k and mutual funds that I pay into monthly, but how much should I be saving on my own for a "just in case" scenario?
R.A.Y.
Dear R.A.Y.,
Instead of telling folks what to do with their money, I prefer to teach the decision-making process that will help them to navigate their situation and provide tools that build money smart habits. I believe if your strategies don't resinate with you, then the habits you're trying to build will be less likely to stick. The key to a good saving strategy is diversifying your savings and finding a comfortable balance of risk vs return.
It's great that you've started working on your savings! 👏👏👏 Oftentimes, working on savings goals is put off until later because people feel they don't have enough to put aside. If you need some ideas on how to start working your savings habits, check out my blog on how to start small. Think about the goals you want to achieve with your savings strategy. Setting intentions for your savings will allow you to set smaller goals that align with what you want to achieve.
People tend to lump retirement savings into the same group as traditional savings, mutual funds and other investments. It's important to note that there are severe penalties for withdrawing 401k funds before you reach retirement age. Here is a Wells Fargo early withdrawal calculator that can give you an idea the level of fees you can expect to pay if you move forward with an early withdrawal. It's important to keep this in mind so that if you're facing a hardship, taking out your 401k funds shouldn't be taken as lightly as withdrawing funds from a savings account.
With that said if you're able to put aside retirement funds now, it's not too early to start! The more you put aside now, the less you'll have to worry about your fixed income in your retirement. In 2019, 401k contributions limit is $19,000 with a catch-up contribution up to $6,000 if you're over 50. If your company offers a match, it's an even better opportunity to use your money to your advantage. Here is a 401k calculator that can give you an idea of what you're working with. Don't be afraid to ask your HR team to help you understand your companies 401k policies, they will know most about your company's policies.
Consider setting up an emergency fund, money you will set aside for a rainy day, if you haven't started one already. A good place to start is putting aside 6 months of living expenses (rent, utilities, food, phone, etc). Maybe you want to save the entirety over the next year or two, do what fits your budget best. By thinking of your future self, you'll also be decreasing the chances of getting into debt if you were to face a financial hardship in the future.
Investing has never been as accessible as it is today, there are apps that make the process very simple without having a background in finance. Some apps have minimal fees and it can be quite affordable. Most people do find it takes research and a level of dedication to keep up with market trends, depending on how much you can invest you can consider connecting with an advisor that can manage your portfolio for you.
I hope this helps with your question, but if you have any follow-up questions let me know!
Take care,
Olga
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