According to a recent study conducted by CreditDonkey, 41% of Americans have less than $500 in savings. And if you’re among the 76% in this country who are living paycheck to paycheck you may wonder how people have even that much saved up. Read more on how much you should be saving and how you can start saving to avoid debt and bankruptcy.
The Ideal Number and Why
If your savings account is looking pretty bleak and you have student loans, mortgages or debt to pay you may already be living in the red. Financial security means not worrying if you have enough to cover rent, not being surprised by bills and having the freedom to make choices. In order to be financially secure, you need to have three to six months of your annual salary in savings. This means that 25 to 50 percent of your annual salary should be sitting in a savings account.
Three to six months salary is usually enough to cover you in just about any financial hardship you might encounter. It’s enough of a cushion to plan your course of action should you find yourself unemployed. It will cover moving costs should you need to abruptly move and will cover a repair for your car should your vehicle suddenly break down.
How To Get There
According to the 50/20/30 rule, your monthly budget should be divided into three distinct categories of expenses: 50 percent should be reserved for essentials (think housing and food), 30 percent should be allocated for lifestyle choices (things like nights out and 121 channels of cable), and at least 20 percent should go toward what we call financial priorities, which include debt payments, retirement contributions and of course savings.
The biggest problem people generally face isn’t that they can’t manage to allocate the 20% for financial priorities, rather, it’s that outsized debt, like student loans and high credit card balances, eats up most of that 20 percent leaving little left over for savings.
So what’s the best way to divvy up that 20 percent across all of your financial priorities? Emergency savings and payments on high interest debt tend to be the highest priority. Retirement or other savings goals is usually a strong third because it’s critical for your long term financial health but it isn’t needed immediately, such as your emergency savings or paying off your debt.
For more information on how to reduce your debt contact one of our lawyers at Citizen’s
Law Group today!