Tips to help prioritize saving vs. spending
Sure, retirement is a long way off — but you can lay the groundwork right now by putting a priority on saving.
When you're just starting out, there seems to be no end to the demands on your budget, whether you're paying off student loans, saving for a down payment, starting a family — or all of the above. Even so, youth is no reason to forgo making smart financial moves, like contributing to retirement savings or building an emergency fund.
The challenge is not to let other financial obligations keep you from saving.
First, it’s important to consider your goals and what your expenses may be in retirement. Here’s something to keep in mind when considering how much you may need to save: In a recent survey, the median response among financial professionals indicated that individuals need to save approximately 15% of their pay, including employer contributions (if applicable), to have enough income during retirement, assuming they begin saving for retirement early in their career.* We know this isn’t always possible, so consider these tips:
Prioritize your spending.
- Set a budget. "This should include your month-to-month spending and your long-term savings goals," says Glen Young, director of retirement planning for Ashton Young, Inc. in Troy, MI. Remember to rework your budget as your income changes or when major life events occur.
- Tackle high-priority expenses and high-interest debt first. Pay for your needs — housing, groceries, insurance — before your wants — spa days, nights out, expensive coffee. Also attack short-term revolving debt such as credit cards.
- Find balance. Spend too much, and you may be unprepared for retirement or financial emergencies. Save too much, and you could miss out on enjoying your hard-earned money. "We're not suggesting you start putting half your paycheck toward retirement," Young says. "We understand that you have other expenses and wants. Find a compromise."
Establish saving habits.
- Plan ahead. Make setting money aside for retirement a part of your overall budget. To save more and reduce your taxable income, make pre-tax contributions to your employer-sponsored retirement plan. Saving enough to qualify for the full employer match, if one is offered, may help you with your planning.
- Expect the unexpected. Allocate a portion of your budget to building an emergency fund. Start by accumulating one month's worth of income in the account, then increase it to cover three to six months’ worth of income.
- Automatically increase your savings. Young recommends checking to see whether your employer-sponsored retirement plan offers an automatic deferral increase feature. If so, you can gradually save more, and you likely won't notice a significant difference in your paycheck.
- Divert spending into saving. "Human nature suggests that when we see a balance at zero, we should start spending again," Young says. But once you've paid off debt, avoid taking on more. Instead, pay yourself by saving the amount you were using toward debt payments.
Build a better budget
Use our budgeting calculators to help you keep your savings on track.
A financial professional can help you put together a personalized financial strategy — putting your plan into action.
* Research with Financial Advisors, June 2011, conducted by Harris Interactive on behalf of The Principal®. When looking at all responses in the survey, the median is the middle of the responses given.