If we follow the rule of thumb that says everyone should have an annual salary saved by the time they enter the fourth decade, then by age 30, savings should be close to $50,000, calculated according to the average annual income.
However, it’s really hard for young people, and in some cases impossible, to save money in their 20s because of relatively low entry-level salaries and usually high student loan debt.
Starting retirement savings is challenging but far from impossible. That is why in this article, we will cover:
- How much money should I have saved by 30?
- Tips&tricks how to save extra money.
- How to improve your savings.
- How you can save for retirement and become financially independent using the Infinite Banking Concept.
We want to support and help you make a plan and find an investment vehicle that works for you! Even if you don’t have any savings right now, you have plenty of time, and with our advice, it will be easy!
Let’s jump in!
How Much Money Should I Have Saved by 30?
A rule of thumb comes from Fidelity Investments. Once again, that retirement-savings benchmark says you should have saved by age 30 an amount equal to your annual income.
It’s not the only retirement-savings rule of thumb. Some lesser-known suggest having half of the annual income saved by the age of 30.
That implies acting more responsibly in later years, and it is more realistic.
Unfortunately, this is still impossible for many, whether because of small salaries or student loans.
How Do These Benchmarks Works?
Fidelity, T. Rowe Price aims to break down big numbers into smaller, incremental savings targets and help every individual in their savings journey.
Unfortunately, for many people, even smaller goals are inaccessible.
There are many retirement savings advice, don’t forget to:
- Stay calm. People can get very anxious when they see recommended amount of savings for their age group. Even if you are behind approved savings by age, everything is fixable.
- It’s only a general suggestion.
Recommendations aren’t custom-made for your financial situation, life expectancy, retirement spending plans, retirement age, or investing strategy.
Benchmarks can be a good, quick guide for progress, but there isn’t one recipe for success in retirement planning or savings in general.
Set Your Savings Goals And Make a Plan
Some people are interested in making savings or retirement goals independently, while others are more comfortable working with financial advisors.
If you prefer to do it yourself, maybe it is wiser to use a retirement calculator instead of benchmarks.
These calculators are more personalized because they will take your information and return more custom-made guidance.
We made an easy checklist with the steps to create a savings plan.
Step 1: Understand Your Financial Position
You can make a list of financial inventory where you will list all liquid assets and liabilities.
Step 2: Create Your Savings Goal
If you don’t have experience in making savings goals and it’s all overwhelming for you, try setting a short-term goal first. When you achieve your first goal, you will be much more motivated to continue and make more long-term goals.
Depending on your monthly income and preferences, make different categories like emergency savings, saving for retirement, and special funds like a house, student debt, or car down payment.
Don’t forget to keep your goals S.M.A.R.T:
- Specific
- Measurable
- Achievable
- Realistic
- Time-bound
3. Decide How Much Money You Will Set Aside for Each Goal
This is individual, but make a list of priorities depending on whether it is a long-term or short-term goal and how much you will need to achieve it.
Step 4: Choose Where to Keep Your Savings
We will cover later in this article the possible option where you can stash your money.
Tips To Save More Money
Let’s focus on how to start saving even if you have zero savings right now!
Emergency Fund
Most people end up in debt because they don’t have money on hand in case of an emergency.
So, the emergency fund is crucial for financial security, whatever your age is. The recommended amount in this fund should be equal to 3 to 6 months of your monthly expenses.
There are many ways to keep that money safe. Probably the most common one is savings accounts. Earning interest in this account is less than 1%, and people usually choose this option because it’s easy to set up and the money is safe.
Maybe it’s beneficial for people with zero control when it comes to buying and spending, but we want to encourage you to make way better earning interest.
Invest in Tax-Advantaged Retirement Account – 401 (k) And Roth IRA
First, check out if your employer offers a retirement plan with matching contributions.
If they do, the advice is to contribute to both retirement accounts.
If you cannot contribute to both, at least contribute to 401 (k) the matched amount. An employer matches essentially doubles your savings, and you can consider it as free money.
And after that, if you have additional money available, contribute to an individual retirement account (IRA).
A Roth IRA is the most beneficial option of all retirement accounts because you give up on a tax break now, when usually the tax bracket is lower, and in retirement, the income is tax-free.
Also, everyone can withdraw their contributions at any time, although without the earnings on those contributions.
In 2022, the IRA contribution limit is $6,000 for people under 50 years old. The ability to retire depends more on your savings rate than on your income.
After contributing to these accounts, people who have additional money usually take the next step and store their money in a high-yield savings account. These accounts earn much more interest than the national average for a traditional savings account.
Pay-Off High-Interest Debts
Maybe it seems contradictory to pay the high-interest debt to save more cash, but in the long run, it is true. If you choose to invest instead of repaying your debt, it’s possible to have to pay more in interest on the debt than you will earn by investing.
High-interest debts depend on every situation, but the interest rates on credit card debt are usually the highest.
Next is student loans, but there are some differences too – private student loans are higher than the rates for federal loans.
Federal loans don’t accumulate interest, so maybe it’s better to put those payments toward other debt or into a savings account.
When it comes to low-interest debt, like a mortgage, paying it entirely in your 30s isn’t always the best option.
Many professionals advise investing that money to benefit from compounding interest.
7 Dave Ramsey Baby Steps
Dave Ramsey, a personal finance expert, came up with a plan to achieve financial freedom and live a debt-free life.
The success of this plan is seen in millions of people to whom it changed life.
We won’t go in-depth about the plan in this article, but here are some basics.
- The first baby step is to save $1000 for your emergency fund.
- Pay off your loans by using the debt snowball. It is based on making a list of your loans, from the smallest balance to the largest, but without your mortgage. Dave Ramsey advises to pay off the smallest debt and then move on to the next lowest on your list.
- The next baby step is contributing 3 to 6 months’ worth of expenses to your emergency savings fund.
- After that, you are ready to invest 15% of your household income in your retirement fund.
- The fifth baby step is to save for your kid’s college fund.
- Second to last baby step is reserved for paying off your mortgage debt.
- The last step of this financial plan is to build wealth and give.
This plan has some downfalls, such as it would be better to first pay your high-interest loans instead of the smallest. But, overall, it’s a helpful guide that will get you on the right track with your finances.
The 50/30/20 Rule
The 50/30/20 is a method of splitting your after-tax income into three categories: essentials, wants, and savings.
You should be dedicating 50% of your income to fixed expenses or essentials. This category involves housing, groceries, utilities, health care, and transportation expenses.
You shouldn’t spend more than 30% of your money on flexible expenses or wants. By that, we mean education, debt payments, child-care, health insurance, and major subcategory of personal expenses (referring to things like clothing, traveling, gym, Netflix, home security, mobile phone, internet, cable TV, and much more).
This is tricky because people usually spend too much money on this category. The secret is to keep up with your spending habits and stay within the limit.
The last category is savings, and there should go 20% of your income.
Of course, this rule of thumb also has its critiques. Some financial experts argue against it because they think it’s inefficient for people with higher monthly incomes.
But, the 50/30/20 rule is pretty customizable. Perhaps, if the allocation of 40/30/30 works better for you, nothing can stop you!
The pros of this approach are that you can follow it whatever your income is. There is no excuse not to start saving today!
We criticize this financial plan because it ends only in savings. We think that is not enough. After saving, one must start investing to preserve the value of money and, of course, earn more cash.
Investing Is As Important As Saving
Saving money is not the last step of your financial journey, whatever your way of saving is. Only people who started investing were able to save three times their annual salary for their retirement at the age of 40.
It’s vital to understand the power of inflation. At this time, money is changing incredibly quickly, and the money you have saved now will not be the same in the future. As well as, that amount of money now doesn’t have the same value as in the past.
We don’t buy a car to keep it in a garage and never drive it. The same is with money. We don’t want our money to be sitting in the bank account.
The whole point is for our money to make more money. Here is an example to illustrate it: if someone invests $5,000 annually into an investment account growing at an average annual return of 10%, in 30 years, it will accumulate over $822,000. That is $817,000 of extra cash.
The nature of money is to be in movement and to continue building your wealth. The best possible way to invest your savings is in cash-value life insurance.
Cash-value life insurance has two components: savings and death benefit coverage.
Policyholders can draw and borrow money thanks to the cash savings component.
You can pay unpaid premiums, complement retirement income, or repay existing debt with pulled-out money.
There are several cash-value life insurance options, but we recommend Whole Life insurance.
Whole Life Insurance Policy
Why exactly Whole Life instead of any other option? Because with Whole Life insurance policy, insurers determine fixed-rate with whom cash value is growing.
It also has fixed premiums, and the cash value is earning interest similar to an alternative savings account.
After that, with Whole Life insurance, you decide what you will do with the funds to start making rates of return.
And it gets even better! Whole Life insurance is the first step to achieving your financial goals and independence.
Build Your Wealth Using the Infinite Banking Concept
With Whole Life Insurance, you can use the Infinite Banking Concept, or over-funded life insurance, to build your wealth.
And it’s really straightforward. You just need to borrow and repay money deposited in your policy’s cash value account.
The following are three easy steps on how to use this method:
- Overfund a high cash value whole life policy with after-tax funds.
- Accumulate tax-free cash value throughout the years you’re the policy owner.
- Took out tax-free loans against your whole life insurance policy’s cash value.
So, over-funded life insurance imitates the process of the traditional bank. But, instead of traditional loans, fees, and high-interest rates, you will have your bank and become your own banker.
The biggest advantage of over-funded life insurance is that it’s customizable, and you can use it for anything you want – from saving for retirement, paying off a student loan, or buying a new car.
Final Thoughts
We wanted to cover some essential guidance on how to start saving and what is the best way to invest.
This article refers to people of all ages, so don’t overthink if it’s too early or late. The perfect time to start working on your financial goals is today!
And the best way to achieve your financial freedom is using the Infinite Banking Concept.
Here at Wealth Nation, we support and help people to accomplish their aims, so if you are ready to do the same, watch our masterclass and get started with your own financial journey.