Saving Strategies

Accessible savings are needed not only for emergencies, but also for both short-and long-term goals. The 70-20-10 Rule shows how you can successfully divide your money into amounts saved for retirement, emergencies and goals. To follow the 70-20-10 Rule, divide your income in the following manner:

• Spend 70 percent for living expenses such as rent, food, clothing, and gasoline.
• Save 20 percent:
• Save 5 percent for an emergency fund. The goal is to save three to six months of living expenses in the account. This is not for impulse spending. Keep it for unexpected expenses like car repairs, lay-offs, and medical expenses.
• Save 5 percent for specific goals - vacation, car, school tuition and a new computer.
• Invest 10 percent for the long term. These funds are earmarked for you retirement - IRA, 401(k), 403(b), and company pension.
• Spend 10 percent for debt payments like car payment, credit cards, student loans, but exclude a first mortgage.

Realize that when you exceed these percentages in any category, it means a reduction in the other areas. If your living expenses are high, you won't be able to save as much. Similarly, if your debt level is too high, you won't be able to contribute as much as your savings, investments or both. If you want to put more money into your savings, all you have to do is decrease your living expenses, decrease your debt or do both.

A textbook-like math problem to explain how this works:

Do you think it's easier to part with $95 a month or $2,413?

Fred and Steve are both twenty-two years old. Fred started putting $2,000 a year into an Individual Retirement Account (IRA) for nine years, starting at age twenty-two and ending at age thirty-one.

Steve waited for nine years and then started putting $2,000 a year into an IRA, at age thirty-one, for thirty-four years until retirement at age sixty-five.

Assuming both IRA's earned 9 percent, who has more money at the age of sixty-five?

Fred will. His account will grow to $579,504. Steve's account will only grow to $470,247. How can this be? Fred only invested $18,000, while Steve invested $70,000. The answer is compound interest. While Fred invested less money, he started nine years sooner than Steve did. Steve's money just didn't have enough time to grow.