While I was searching the Internet looking for topics on frugality and saving money, I stumbled upon an article that was published on MSN Money titled “How Much Is Enough?†.
The title struck a chord with me immediately, so I clicked and read the article. It brought up something that had been on my mind lately, but I hadn’t yet put into words: the age-old question of “How much money is enough?â€
As a self-employed writer, it’s always seemed that I’ve never had enough money. My biggest goal two years ago was to have an emergency fund of at least $10,000 so that if my work dried up, I could coast for a bit and not have to scramble to put food on the table.
And really, that’s when my quest for saving money and being frugal began. The goal of hitting that $10,000 mark became like a contest that I wanted to win badly.
Funnily enough, however, once I reached my mark, $10,000 didn’t seem so “safe†anymore. During my quest to save up an emergency fund Andrew and I had bought a house. Our expenses were higher. And suddenly, I wasn’t satisfied with $10,000 in the emergency fund. So I bumped up the number.
Which led to the slightly troubling feeling that I was starting to chase something that I might never catch; that feeling that if I just had enough in the bank, I wouldn’t have to worry.
But, what is that magic number? When does enough become enough?
For most people, they never stop and take the time to analyze this question. Stories abound online of millionaires, and multi-millionaires who don’t feel they have “enoughâ€, so they keep slaving away at work, endlessly chasing that magically elusive number.
And, I’m not excluding myself. Up until I stumbled across that article, I hadn’t given any thought to what was “enough†for me. Every time I hit a goal or benchmark, I wasn’t taking the time to applaud my success. I just kept driving myself harder.
Finding Your Magic Number
So, how do you go about finding your “magic number� You know, the one that would allow you to feel safe and pursue your dreams at the same time.
First you need to figure out what you’re saving money for. Most people need to save money for three important reasons:
• Emergency Fund
• Retirement
• Their children’s college education
Think of these as the “mustsâ€. These are The Big Three: the things you need to save for first.
After you’ve got yourself on a savings plan for these top three, then you can start setting money aside to do the fun things in life, like take a trip around the world or start a business. But, let’s look at The Big Three first.
Building An Emergency Fund
According to the National Foundation for Credit Counseling, a third of Americans have no emergency savings at all. This is a scary statistic, and if you’re not currently building an emergency fund then this is where you need to start.
Most experts recommend having at least three to six months set aside in an emergency fund. This may seem overboard to many people, but having finally built up my own emergency fund (after years of saving) I can tell you firsthand that the security it brings is more than worth it.
If you’re part of a working couple (that is, your spouse or partner contributes to the household income) then you might be fine with three months. If you’re the sole provider, then plan on putting back six months worth of expenses.
To figure out how much you’ll need, you have to figure out your monthly expenditures. Basically, you must know how much money you need each month to keep living. Write down all your necessities: your mortgage, utilities, groceries, car expenses, health insurance, property taxes, etc.
This number, whatever it is, should be your first savings goal.
Retirement
Ok, saving for retirement could be it’s own article (or book, come to think of it…), so I’m only going to talk about the very, very basics here. You can read more about retirement planning here.
Probably the best thing to do (if you’re not currently putting anything back for retirement) is to use a retirement calculator to compute how much you should start saving for. The reason why retirement deserves its own article (or, series of articles) is because it’s incredibly complicated. Every person has a different situation, so it’s important to research as much as you can to ensure you’re saving enough.
For instance, a 27 year-old earning $45,000 per year maxing out their Roth IRA is going to have different needs than a 45 year old earning $75,000 a year who is just getting started preparing for retirement.
And, there are other major questions that need addressing. For instance, when do you want to retire? What kind of lifestyle do you want after retirement? Do you have any other income you might count on? Does your employer offer matching 401(k) contributions that you can take advantage of right now?
MSN Money has a wonderful retirement calculator that can help you get started planning. Retirement calculators are great tools to help you get started sorting out your savings plan.
As a general rule, you should be saving at least 10% to 15% of your income for retirement.
Saving For College
Thankfully, saving for you kid’s education is a bit easier than it used to be, thanks to the government’s 529 Plan. This plan is also called a Qualified Tuition Plan.
The 529 Plan is like a Roth IRA. The money you put in is after-taxes, but the income you earn on your investment is tax-free.
This means that if you invest $10,000 of your own money into the 529 Plan, and you earn $5,000 on your investments, you don’t pay taxes on that extra $5,000 you earned.
Now, with the 529 plan you can contribute up to $12,000 per year, per account, without falling under the IRS’s tricky gift tax.
There are two different types of 529 Plans: the QTP College Savings Account, and the QTP Prepaid Tuition Plan. This is another one of those topics that really deserves its own article, which I’ll get to eventually! For now, check out this great breakdown from SmartMoney.
Following Your Dreams
Ok, so now we’ve covered The Big Three; the things that you should be doing first before heading off to Sri Lanka on a backpacking expedition or quitting your job to pursue a career in sky diving.
Sidenote: this doesn’t mean that you have to fully fund your retirement account or your kid’s college savings before following your dreams. It simply means that you should get in the habit of saving first. Make it a priority.
Now what you’re going to do is make a list of your top 5 dreams. What do you want most to do with your life? What secret desires do you have that makes your heart quicken with excitement?
For me, right now, it’s paying off my mortgage. That’s the goal I’m working on every day. I’ve put myself on an aggressive savings plan, and I’m not getting off it until I can call up the bank and pay them off in one fell swoop.
That is something that makes my heart sing with joy. Once my house is paid off, I’m moving on to my next goal. And I’ll keep going down the list, one by one.
So, what are your dreams?
Once you have a list, put a price on each item. For instance, my dream of paying off my house is easy to put a price tag on: I need $110,000 to do that, which is how much I have left on my mortgage.
Once you have a figure, then you should open an account and start saving up for Dream #1. I use ING . It’s incredibly easy; I have automatic deductions that come out of my checking account each week. I pay for my dreams first.
At ING you earn 3% on savings. And even better, it’s super easy to set up multiple accounts. And, you can name them whatever you want, which keeps your dreams front and center.
So, what’s the final verdict? Well, everyone is different. We all have different dreams, different financial obligations, and different priorities. But taking time to figure out how much is enough is vital. If you don’t, then chances are high you’ll just keep chasing an invisible number for the rest of your life. You’ll pass up all the good things: lazy summer afternoons, hammocks, night walks, all because you’ll be working. There will be a constant tension in your life, and no matter how much abundance you have you’ll never be satisfied.
More than enough people are living like this already. So let’s not be a statistic, right?
Decide what you want and then set up a plan to get there. Once you’ve got a plan, do everything you can to automate it (like automatic savings). After that, let it go and enjoy your life. We only get so many summer afternoons and night walks, anyway.
