A money question I received from one of my readers is:
I stay at home with the kids, and my husband was out of work for a long time, but is now working again (hooray!) so we still have some catching up to do, but I really want to try to set aside a certain percentage of his pay to tuck away. And I figure now is a good time to start doing it because this is income we haven't had in a long time so we shouldn't miss the percentage since we haven't had it. What do you think is a good percent to save?
It's a very good question because many people have some "catching up" to do but focus their attempts on that, and only that, instead of also focusing on putting some money into savings. The reason that setting some money aside, even while paying back debt, is that if you don't have something to fall back on you will have a vicious circle of debt. There are always going to be times when you will need a little extra (car repairs, a broken washing machine, etc.). If you are so focused on paying back debt that you forgo setting aside any money, you will need to use those credit cards once again to pay for an unexpected expense; meaning that it will be very difficult to get ahead.
Continue to do the good work of paying back your debts but "pay yourself" a little each month as well. A good rule of thumb for someone who is just getting back on their feet, or one who has very little extra month, is to start small. Even if it is as small as 1-2% of each paycheck. It sounds like such a small amount...so small in fact that you very well may think that it is pointless...but it adds up over time and it is better than nothing. For example, someone bringing home $1,000 bi-weekly will put $10 in savings bi-weekly (or $20 monthly) if doing 1%. By the end of the year they will have $240 in a savings account. Not a lot, but a whole lot better than no savings at all! So I urge everyone, even those that think there is no room to save, to put the very minimum of 1% of their pay in savings each month.
For those who think they can save a little more, I would strive for 3-5% to begin with. Someone making $1,000 bi-weekly would then be putting $30-$50 in savings bi-weekly ($60-$100 monthly). This is a reasonable goal and your savings will begin to add up. If you notice within a few months that you think you can up the savings, go up from there.
Saving the percentage of your paycheck is not the hard part. The hard part is not touching your savings except for an emergency. This is the part that gets tricky. Many people will do great with saving for a month or two but then dip into it for something that is not a necessity and get bummed out with an empty savings account and stop saving altogether (it's similar to being on a diet and being gung-ho at first, only to binge and gain the weight back and stop dieting because of that). Savings must not be thought of as "money" but rather as an "emergency fund".
Savings from an emergency fund should only be used for emergencies or unexpected expenses. Not for dipping into for a night out on the town, a new pair of shoes, a trip, or anything that is a "choice" and not a must. I have often remarked "We don't have money for that this week" to my husband or a friend. It doesn't actually mean that we don't have money, because we do keep a certain amount in savings...but it means that we don't have money in our checking account for that and if it isn't a necessity I'm not going to take out from savings for it...in my mind if it isn't in our checking account that week we don't have money for it. I'm going to contradict myself a bit now when I say that it doesn't mean that we never use our savings for a little fun money. Because we do. The thing is though, that in our minds we have a set number that our savings should always be at for an emergency. If our funds tend to get a little above that we have no qualms taking a little out for a fun birthday gift for the kids or a fun little day trip. But we only do so if our savings funds is already at our goal, if it's below our goal we don't touch it for fun at all. Savings just won't work if you use it as a flexible account.
With that said, what is a reasonable savings goal for a typical family? Most financial experts stress that a good savings amount is two to six months worth of income. That's a lofty goal and we tend to fall on the smaller side of that amount. It's a nest egg that give you a little breathing room if you are injured and out of work, if your car breaks down and needs a major overhaul, if the roof on your house needs redone, the furnace needs replacing, etc.). It can seem a daunting task at first but you must pace yourself. It can take years to reach your goal but even a journey of a thousand miles begins with one step. If an emergency does arise and you spend much of the savings that you accumulated, you start again and add to it until it reaches your goal once again (or rises above your goal!). It's a never ending battle but it's the only way that you can grow (and keep!) a savings account.