You save to mitigate personal disaster.
Let’s zoom out from granular advice on maximizing returns on your taxable and retirement investments, or deep dives on CD yields or mortgage rates. At the most basic level, savings enable you and your family to enjoy the freedom associated with money, and avoid the pain of debt.
There are two main reasons to set money aside: Insurance against bad financial weather, and provision for your retirement. You might also save for a down payment on a house, or for your wedding, but the first two are the must-haves.
Bad news: We’re not doing so well on either point. About half of Americans are at risk of lowering their standard of living in retirement, according to the Boston College Center for Retirement Research, while less than 20 percent of people feel very confident they’ll enjoy a comfortable retirement.
Only 41 percent of Americans would pay for an unexpected $500 charge out of their savings, according to a Bankrate survey. Americans are struggling to earn more than inflation, the return on savings can barely be felt, and credit card debt is piling up for families of all income levels.
It’s easy to get lost and fall behind. Your day teems with never-ending to-dos of varying importance. You’ve got to get the oil changed, buy health insurance, call the pediatrician, get the house ready for the in-laws, and so on. It’s difficult to prioritize properly funding hedges against disaster when you can barely get through the day.
Below you’ll find a helpful guide to how much you need in savings right now, and for retirement, over the course of your life. Of course, everyone’s situation is different, so think of this as less of an exact number and more of a guide that you can apply to your own life.
How much do you need in an emergency fund?
Let’s start with the emergency fund. The standard financial advice is that you should aim for three to six months’ worth of essential expenses, kept in some combination of high-yield savings accounts and shorter-term CDs.
An essential expense for me—say, my son’s health insurance—may be something you don’t have to worry about. Moreover, my rent might be less expensive than your monthly mortgage payment.
Broadly speaking, there are six costs to focus on: Housing, transportation, food, health care/insurance, utilities, and debt, with the first two carrying the biggest punch.
How much do I need in savings by age 30?
Households led by someone between the ages of 25 and 34 earns an average of $66,470 a year, according to the 2016 Consumer Expenditure Survey. If you take conventional wisdom, this household, which has on average one child, should have about that much stocked away in retirement accounts. Check out this calculator to get a more in-depth look into your specific retirement needs.
As for the emergency fund, they spend a monthly average of $1,550 on housing, $758 on transportation, $575 on food, $242 on health care and insurance, and $275 on utilities. Toss in an additional $56 a month for credit card debt, and that monthly essential spending costs $3,456.
(Credit card debt is used as a proxy for debt, and assumes you’re paying a 4 percent minimum. Federal student loans are a huge source of debt, especially for millennials, but they typically give you flexibility in the event you lose your job.)
Multiply that by three to six, and you’ve got your emergency fund.
- Retirement savings goal: $66,470
- Emergency savings goal: $10,368 to $20,736
How much do I need in savings by age 40?
Those aged 35 to 44 earn an average income $92,576. Conventional wisdom states this couple should have three times that amount saved.
Their monthly spending consists of $1,908 on housing, $867 on transportation, $725 on food, $342 on health insurance, $358 on utilities and another $100 on credit card debt. That comes to a total of $4,300 a month.
- Retirement savings goal: $277,728
- Emergency savings goal: $12,900 to $25,800
How much do I need in savings by age 50?
This is the time you hit your peak earnings. It’s also when you’ll spend the most money in your life.
Those aged 45 to 54 earn an average yearly income of $99,423. Experts tell these stressed out folks they need six times earnings in their retirement accounts.
That might be difficult due to their spending. Housing costs actually go down slightly, to $1,833 a month, thanks in large part to paying off the mortgage. Nevertheless, you still owe $917 on transportation, $733 on food, $408 on health care and insurance, $383 on utilities and $112 on credit card debt. Or $4,387 a month.
- Retirement savings goal: $596,538
- Emergency savings goal: $13,161 to $26,322
How much do I need in savings by age 60?
Time to wind down. You’ve probably moved on from the most stressful period of your career, either voluntarily or not, and now you’re preparing for the last third of your life. That’s why earnings and spending start to fall.
Those aged 55 to 64 earn an average yearly income of $80,474. You’ll want to have saved at least eight times that for retirement.
Thankfully you need less in your savings account. You spend $1,550 on housing, $808 on transportation, $600 on food, $458 on health care and insurance, $350 on utilities and $100 on debt. That’s a monthly total of $3,867.
- Retirement savings goal: $643,792
- Emergency savings goal: $11,600 to $23,200
What you can do
These numbers can be somewhat misleading. By the time you hit 60, you’re expected to have retirement savings 30 times greater than your emergency fund. How the hell is that supposed to happen?
Remember, your retirement saving has some advantages. The contributions you make aren’t taxed, and you might also get free matching money from your employer. The money itself takes advantage of compounding interest. Save 10 percent to 15 percent of each paycheck, including any match, and you’ll be on track.
Your emergency savings, meanwhile, is after-tax money that earns barely any return at all and you get no help from your job except for the paycheck. Kids cost $275,000 to raise (and that doesn’t include college), roofs break, family and friends need help, hips break and layoffs happen. Your emergency fund needs to weather all that.
Set up automatic contributions to your savings account—you’ll probably not even notice the money’s missing every two weeks. Bank any bonus or raise, try to live beneath your last salary, and when a debt is paid off, or an ongoing expense evaporates, put that money toward your emergency fund.
Constant vigilance is the only antidote to disaster.