Save more than you think

Question: Help! I am a 31-year old school administrator in a committed relationship, no kids yet.

My girlfriend and I both try to save as much as possible, but we have little idea of what proportion to do this in at this time. Are there rules of thumb as to what our savings ratio should be? After filling a short-term "emergency fund," what percent of our savings should go to retirement? To income investment accounts? To fund "special" expenses like cars, vacations, charitable giving?

I know lots of models exist for retirement savings, but how about for an overall savings plan? Thanks! Danny, Greensboro, NC

Answer: Well, help is on its way. But take a seat first. A reasonable rule of thumb is to save between 20% and 30% of household income. Yes, you read that right.

About half that sum will go into tax-sheltered retirement savings plans and the remainder into a variety of taxable savings accounts, from certificates of deposit to equity mutual funds.

It's a goal, of course, but it is reachable with time. For instance, each of you might be putting 10% of income into a retirement savings plan. You could both gradually boost the contribution to 15% by taking advantage of any wage increases--and hopefully wage gains lie in your futures.

Similarly, I would "automate" other saving as much as possible. Set it up so that money is automatically transferred every month from checking accounts into safe savings, such as a savings account or CD. I quoted from Jim Wang of Bargaineering.com in a Makin' Money post.

But what I really like from the post is this insight:

One of the great lessons of personal finance, and in life, is that if you can "set it and forget it" then more people will do it. Make automatic contributions to your 401(k), make automatic transfers from your checking to savings - make automatic and you'll go far.

Again, the two of you can slowly increase the amount of the transfers as you become comfortable with the strategy.

Once you have a bedrock stash of safe savings of, say, 6 months to a year's worth of expenses you can start putting some of the automatic transfers into riskier investments, such as a low-fee balanced fund or broad-based equity index fund.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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