There are certain government programs set into place to help out those who are citizens. However, most of them are designed to be last resort, or to just give a little boost. This is how it is with Social Security, Medicaid, Welfare, and several other programs. They are more of a safety net than something to be relied upon. The majority of people will want to have savings plans for themselves, so they can take care of themselves when the time comes. The biggest question on most people’s minds is how much and where they should save.
The first step to knowing how much can be saved is to know how much money is coming in, and how much is going out. While a fully detailed budget is not necessary, you must have a grasp on the rough numbers. The income part is easy to determine, the expenses part may take a couple of months to get a handle on it if you have not already. Once you know what you need to survive, the best way to save is to pay yourself first. Before spending anything else, a certain portion gets set aside into 3 categories.
There is no set amount that everyone should save in an emergency fund. It all depends on the person’s earning ability, and their goals in life. Some may be comfortable with a savings that would provide six months of living expenses, others will be comfortable with two years worth.
If you are not taking advantage of at least the matching contribution in an employer sponsored plan, that needs to be done first. After the 401k has been set up, contributing to an IRA should take place. While a Roth has great tax advantages, a traditional IRA is better than nothing.
Just like a child growing up gets an allowance from his or her parents, it is important to set aside money to just have some fun with. Go to the movies, out to eat, drinks with friends, or whatever you choose, having fun with the money now will alleviate stress.
Imagine an individual who takes home $2,500 per month after all his taxes are paid and after his 401k contributions have been made. He knows that his monthly expenses total $2,000 (that pays his rent, utilities, food, gas, and every other regular expense). This leaves him $500 each month. Without a plan it is tempting to say he has $500 of spending money that he can go play with. Instead, he will pay himself first. As soon as the paycheck clears $200 goes to his emergency fund, $200 goes to his IRA, and $100 is left over for him to spend and enjoy. After he has saved, he knows he will still have enough to pay all his bills.
Everyone’s situation is different. Some will want to save more and spend less; others will have higher bills and not be able to save as much. The idea is to have a plan, and stick to the plan. For many people seeing the money come in is a sign for them to spend it. To get around this psychological barrier, automation can be used. Have the paycheck deposited automatically, have all bills come out automatically, and have all savings distributed automatically. This will leave just the “play” money to spend at will.
This article was first published on http://moneyprime.com.