We would all like to have enough money to do the important things: live life, retire comfortably, educate our children, and so on. More importantly, how do you make sure that you have enough to reach these various goals? Careful planning is essential, but you need to start from the bottom and work your way up to the big goals.
For an emergency
If you have a steady job, the general rule of thumb is to have 3-6 mos. of living expenses in the bank in case of emergency. If your job certainty is under question, 6-12 mos. of living expenses in the bank is best. So calculate those monthly expenses, don’t forget the one-off and quarterly expenses/bills, and you now know how much you need for your rainy day fund.
Next for many people would be a vacation fund. This will probably vary depending on length of trip, destination, if you’re single, married, have a small/large family, etc. Consider putting away several thousand dollars over the course of a year, whether it be weekly, every 2 weeks, monthly, etc. Create a dollar amount that you think would suffice and finalize a number that’s a bit higher just in case of unforeseen expenses and set a date(s) when you need the money. Now you know how much you need for your vacation fund.
Saving for retirement would be next on most people’s lists. This is a tough one to calculate the dollar amount for because there are so many factors, but it can be adjusted over time depending on circumstances. A common rule of thumb is annual income needed in retirement is ~ 70-80% of your final annual salary when you finish working full-time. You would need to make sure that this amount of money would be able to last you for 25-30+ years, since running out of money in retirement is not ideal. Retirement needs can vary depending on pension plans, 401(k) savings, IRA savings, if part-time work in retirement is an option, if you want to leave money to heirs, escalating health care costs, increase in living expenses, etc. A combination of frequent and smart investing, taking the appropriate amount of financial risk, and having a qualified financial advisor to serve as your money “conscience” can help many people successfully stay on this difficult track.
Saving for college for a child or children is optional, but many feel as if they’d like to help put something towards the education needs of their children. Depending on how much help you’d like to provide, figure out the cost of colleges now and realize that the costs have been growing on average 5-7%/yr. over time. Once you know the dollar amount you need to fund, set a savings goal with a quality 529 plan and make regular contributions to fund that need in full.
If you’d like to leave money to your heirs/charities/foundations, figure out how much you’d like to leave as a gift and keep that money separate from all other goals. This will be highly personal for those who wish to do so, so the dollar amount is subjective. Setting the dollar goal is important and making sure you have this in place before you pass away – along with the necessary legal documents – is imperative so that your wishes are honored.
Big Money Goals
There are other big money goals in life, such as saving for home purchases (for those who wish to own a home), purchase of vehicles, nursing home/long-term care needs, health care situations, purchase/sale of a business/property, starting a new business, changing jobs, etc. The situations above all require figuring out the variables required to calculate a specific dollar amount needed, a time frame for when the money is needed, and crafting the savings plan/vehicles to help make the goal a reality. This is the blueprint for figuring out how much money you need, no matter what your goals are.
Find an experienced financial advisor who creates & implements client goals, works for an RIA firm, earns his/her money from fees (NOT commissions), believes in having an abundance of investment choices for clients, and has the heart & demeanor of a teacher – NOT a salesman – and chances are you’ve found the right financial advisor to help you prepare and plan for your future.
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