In some ways, at least, personal finance guru Suze Oman doesn’t believe in perfection. She was asked in her recent interview on CNBC’s Women & Wealth. show Next question: “Given your expertise, is there a complete formula for how much to put in emergency funds versus how much to spend on retirement and random items? What percentage? Would you recommend it?”
Orman’s answer: “I’m not one of those people who believes that each of your situations are so different and uninteresting that you can only put them here and there. It’s going to be different,” Orman said. She also said: hold your money (Good news for savings: Many high-yield savings accounts are now paying more than they did 15 or so years ago. See the best savings account rates available here.)
Do other money pros agree with Oman?
Many people do. In fact, her Elyse Foster, a certified financial her planner at Harbor Welth Management, says the perfect prescription is the one that’s right for you and your situation. “There are some sensible commonalities, but everyone is a little different,” says Foster.
Eric Presogna, a certified financial planner at One Up Financial, also says there is no perfect formula. “Emergency funds need to be prioritized first and foremost over saving for a 401k or IRA. With all of your savings tied up in your retirement account, it’s hard for an investor to credit his card debt for emergency spending. I’ve seen too many examples of stacking up,” he says Presogna.
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In general, pros agree with Orman that paying off debt, having emergency savings, and saving for retirement are essential to creating financial independence and success. Details may vary by professional.
What Money Experts Say About How Much Emergency Savings You Need
Orman recommends more emergency savings than most. In fact, the CFP board says it’s wise to set aside three to six months of fixed costs for emergency funding. “We target a three-month starter emergency fund for clients competing for many important financial goals, such as buying a home, paying off debt, or contributing to retirement. Once we hit all our goals on track, we’ll raise our emergency fund goal to six months,” said Danna Jacobs, certified financial planner at Legacy Care Wealth.
“I think one to three months is a good target range for young people with little to no cash. because it helps us,” says Eric Plesonia. One Up Financial Certified Financial Planner. And once you have emergency funds, Presogna says, he likes to put a twist on the 50/30/20 budgeting rule. This is 50% for needs, 30% for wants and 20% for savings. “Instead, I think we should focus more on savings than discretionary spending. We need to spend 50% on needs, 30% on savings, and 20% on discretionary goods,” Presogna said. say.
Caleb Paddock, a certified financial planner, has a slightly different formula for calculating the emergency savings you need. Use personal burn rates, not client income. For example, if a client spends $5,000 on a monthly basis, his recommended savings formula is: If income is one, he targets 6 to 12 times his monthly cash reserve expenditure, or $30,000 to $60,000. With two incomes, if he targets four to six times his monthly expenses, in this example he’s $20,000 to his $30,000,” Paddock says.
No matter how much you try to save, Orman recommends automating your savings. “Whether it’s $50 a month or $100 a month, whatever it is, you choose to automate it. Remember one thing. “When even a small amount of savings brings peace of mind, it is liberating and empowering. You can get around that cycle,” says Foster.
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What money experts say about how much retirement savings you need
As a general rule, according to the pros, you should aim to save 10% to 20% of your income for retirement. Another way to calculate how much you can save is to work backwards. “I will decide how much I will earn after retirement. Then I will subtract Social Security and Pension income to calculate the amount of principal required for a retirement account for the amount of remaining income required. Both are estimates. Considering inflation and longevity, I’d go on the higher side, I’m starting to use 95 and 100 as my life expectancy and 3.5% to 4% inflation might be a future fit range says Mark Kinsella, a certified financial planner with Family Financial Planning Services in Wheaton, Illinois.
However, some experts prefer to stick to exact numbers. “I like the 20/40/40 rule for invested assets, which states that 20% of invested assets go to Roth and 40% to deferred taxes. [like an IRA or deferred annuities] and 40% of taxable [like stocks, exchange traded funds (ETFs), municipal bonds and real estate investment trusts (REITs)]This strategy gives retirees the flexibility to draw from different tax buckets to reduce their tax liability in any given year,” said Cameron Brady, certified financial planner at Michael Brady & Co Financial Planning. .
