Systematic Saving

Hello Everyone!

Today I would like to discuss the best way to ensure that you will get rich. Unfortunately I do not have a get rich quick scheme, but I do have a guaranteed method in systematic savings. There is an important saying "pay yourself first". You should think about your savings in three buckets. The first bucket is short-term savings, or funds that you may need in less than one year. The second bucket is medium-term savings, or funds you may need in one to five years. The final bucket is long-term savings, or funds you will need in more than five years. Here are some examples of each:

             1. Short-term: You should think of this as your emergency fund for unexpected purchases. Some examples would include car repairs, medical bills, and home repairs. Depending on your situation a good rule of thumb is to have between 3 and 6 months of your income in your short-term savings account. So if you make $50,000 per year you should have around $15,000 in your short-term bucket.

             2. Medium-term: This bucket will contain funds for events you expect to occur in the near future such as a vacation, a new car, a wedding, or a down payment for a house.

             3. Long-term: This bucket will contain funds for items such as your children's education and retirement.

Fortunately because you are young the best thing you have on your side is time (see blogs on compounding interest), and if you can systematically save into accounts that you have designated for each of these buckets you will be guaranteed to acquire wealth. You may wonder how much you should be saving. A good rule of thumb is 10-15% of your income per month. Therefore if you make $50,000 per year, you are making about $4,100 (gross) per month and you should be saving between $400 and $600 each month.

Determining which bucket you should put your savings into is the next factor to consider. As a general rule, the first place you should save you money is into a 401(k) if you have one, up to the match. If you are not saving in your 401(k) up to the match you are throwing away money. Then next most important place to save is in your short-term emergency bucket. After you have accumulated your desired 3-6 months of income in your short-term bucket you can start saving in either your medium-term and long-term buckets. Just remember that it is very dangerous to put off saving for retirement because you are young. I would recommend that after you have your emergency fund accumulated try to save into both the medium-term and long-term buckets.

I hope this is helpful. Please feel free to ask any questions. There is a new feature to my blog, you can sign-up for email notifications on the right column so that you will be notified when I have new postings.

Cheers,

Bre