Page 1 of 2
How much should you save? That's the question many people ask themselves each year. Some people have golden rules such as 10% of salary while others fixate on a specific amount, for example $500 a month. How to measure it also varies. Some people include retirement funds while others exclude them. While there is no right answer that fits every one's goals, here are my thoughts on what a typical professional with good income making $100,000 should be saving. For those of you short on time, there is a summary chart on the last page.
Every person should have an emergency fund and this comes first. For younger people that are saving up for a house, your emergency fund might evolve over time into your housing fund. Just make sure that when you buy that home that you have something left in the emergency fund to pay for the hot water heater or the inevitable problem with the roof. In my mind, your emergency fund should never be less than $10,000 and should ideally be equal to six months of your expenses. Frankly, I prefer a year's worth of expenses, but at that point, much of the emergency fund will get invested like your normal wealth building account. For most people six months should do the trick which if your expenses are $60,000 a year means saving $2,000 a month for 15 months!
Home Down Payment:
Not everyone should buy a home, but if you are planning on it, you should be saving an amount of money that will let you save a 20% down payment within 5 - 7 years. So if you are living in an expensive place where the 20% is $60,000 or more, you need to be saving at least $10,000 a year. If that sounds like a lot of money, then you should either lower your expectations, increase your income, or live cheaper. Let's face it, almost everyone buying their first home that isn't rich will sink nearly every dollar into the down payment, closing costs, and subsequent furnishing. It's just human nature that the moment you have your down payment in hand is the moment you will spend every weekend going to open houses. Assuming a $60,000 down payment saved over 5 years, equals $1,000 a month. Any interest that you earn will just go to cover the closing costs.
Once you have your emergency fund squared away and your house bought, it's time to put together some money for the kids college fund. Hopefully you will have a dozen or more years to save. If your kids are in the sixth grade before you start thinking about college, you are going to have to put some serious money away. The problem is that nobody knows how much your kid's education is going to be and everyone will scare you into thinking it is a monstrous number on the order of your mortgage. Could be, but most likely it will be less because your kid is going to pay for some of it too and they can also take a moderate amount of loans. My method was simple: $200 per child per month after they hit Kindergarten. After a few years, I bumped it up to $225 and then $250 as my income grew. Invested in the stock market, we ended up with about $40,000 a kid. That was plenty and covered about 75% of the tuition. The balance was student loans and work. So call it $250 per kid per month for a dozen years.