A recent survey revealed that more than 75% of Americans don’t have enough money saved to cover their bills for six months. Half have saved less than three months’ worth — and more than one-quarter of those surveyed have no emergency reserves at all.
Building and sustaining savings is really our best strategy for avoiding debt because, without savings, we are likely to rely on credit when the going gets tough.
Here’s a reminder of the “savings bucket” system we recommend, and some good rules of thumb for each bucket:
Emergency Savings – 3-6 months of expenses. This bucket is for the unexpected, like an unforeseen car repair or extended job search. How much to save depends on your income type. Salaried employees should generally save three months. Those with variable income — like a commissioned salesperson — should consider saving for six months of expenses.
Savings to Spend – 50% of the targeted expense, like a new car or college education. This percentage is based on how much you want to save in advance of the purchase. The more time you have, the higher the percentage you can save.
Savings for Retirement – The rule of 25. Ultimately, your retirement savings’ target should be 25 times the annual expenses you expect in retirement.
What comes first? The answer comes down to where you are in life. Whatever your total savings allocation is, make sure you are filling up all three buckets.