Investing each month

Been thinking of what I would have done if I bought one stock each month with the 10% of savings from the day I started working. Taking 10% of each paycheck and buying a stock. that would be 24 stocks a year, investing in those that pay a dividend would be giving a residual income.

Doing that now would still pay off.

What percentage of my salary should I be saving each month?

Everyone wants a comfortable retirement, but research says Americans don't save as much as they should.

It's really had to give a number - because everyone is different

The problem is that beyond the advice to "pay yourself first" it becomes very individualized. The amount you should be saving depends on your age, your current income, your plans for the future and for retirement, your current assets, your current amount of debt, the return you can expect on your money, and many other factors.

My father taught me from my very first paycheck to take 10% off the top and put it into savings. If you do that long enough, eventually it becomes second nature. That’s a good place to start, but if you need other investments too. If your company has a 401K plan, and allows pre-tax contributions, that’s a great way to sock away savings before you ever see it. Just about any financial planner would agree that 10% isn’t going to cut it when age 65 comes around.



I think that a good goal is to work toward saving 10% of your income in a regular savings account, 10% in a pre-tax 401K plus an annual planned contribution to a IRA account at the allowed IRS maximum (currently $4000 for people under age 50). When your regular savings reaches a benchmark amount, invest all but $1000 in a mutual fund or similar and begin building it again.



The great thing about saving 20%, 30% or more of your current income is that you’re already living below your means! Your victory is that much closer. When you retire, your necessary income is easier to replace. In other words, if you make $50,000 today, and you save 30% of it, you only need to take out $35,000/year from your savings to replace it. (After inflation and blah, blah blah....)



All that is easy to say, the hard part is actually DOING it. The best pieces of advice I can give are:

1) Start Small -- 1% is better than nothing. 2% is better than 1%. If you’re saving nothing, start a small IRA contribution, or a small savings account. Make regular contrubutions and gradually increase them. You get a 3% raise? Half of it goes straight to savings. Get a gift or an inheritance, sock half of it away before you do anything else.

2) Out of sight, out of mind -- Automatic deductions are GREAT. If the money is never in your hand, you won’t even think about spending it. If you’ve got a 401K, take the pre-tax deductions. If your employer does automatic deposit, have part of your paycheck go directly to savings. If you can, have your IRA contribution taken automatically too.
Sources: http://www.fincalc.com/ret_02.asp?id=6

by Myrealana

What Percentage of Income Should Be Saved to Be Financially Responsible?

This article was written by Flexo in Saving.

I’m pointing out a recent article featuring advice from Walter Updegrave, a senior editor of Money Magazine. Recently, he was asked to quantify the percentage of income that any individual should save in order for this particular action to be considered “financially responsible.” Normally, the advice I’ve seen suggests a rate somewhere between 10% and 20% of income, so I was expecting Updegrave’s advice to head in that direction.

Rather than providing a hard percentage, Updegrave took a more nuanced approach.

Well, as much as I’d like to be able to tell you to save 10%, 15% or whatever and you’ll be fine, it’s impossible for me to do that without knowing a whole lot more about you. The percentage of income that’s appropriate for you will depend on your income, age, the amount of money you’ve already saved, your employment prospects and, most important, how much you’re willing to forego immediate gratification for current and future financial security.

It is good to see writers admitting that personal finance advice is not one-size-fits-all rather than going for the knowledge-nugget. Knowledge-nuggets are like those chicken nuggets at that fast-food restaurant with the yellow double arch-shaped letter. They’re tasty, but not very healthy, and you get sick of them after about 25.

Every individual is surrounded by a unique situation, and that should be reflected in personal finance advice.

Tips on the other hand can be general enough to apply to a large swath of individuals. Updegrave answers the reader’s question as best as possible without knowing anything about the individual, but then leads into a few savings tips that are applicable to just about everyone: Start building an emergency fund (and here are 50 tips for building one), be serious about investing for retirement, and find additional ways to save such as automating your savings.

If nothing else, saving 10% of your income is a good start if you’re not saving anything, and saving 20% of your income is a good next step if you’re saving 10%.

10 ways to save regularly with irregular income
By Margarette Burnette • Bankrate.com

When it comes to saving money, everyone has heard the mantra "pay yourself first," but this is not easy to do when you work for a company that doesn't offer steady pay or an automatic "pay yourself" option with direct deposit.

"When you're faced with a job and an income stream that is 'lumpy,' commission-based or paid in cash, the onus is really on you to follow a financial game plan," says Brad Stroh, co-CEO of Freedom Financial Network, a consumer debt-resolution company based in San Mateo, Calif.

Save regularly
If you're one of the thousands of people who gets paid irregularly, how can you save a sizable nest egg or an ample rainy-day fund? Follow these 10 tips to save successfully.

10 tips to save successfully
1. Automate yourself
2. Automate your debt
3. Open CDs
4. Start low, finish long term
5. Go for zero-based budgeting
6. Get real with your goals
7. Kid yourself
8. Spend more on your house
9. Bank your bonuses
10. Celebrate regularly

1. Automate yourself
Even if your employer doesn't offer deductions to an automatic savings plan, set it up yourself with your bank accounts. "Don't just keep your funds in a checking account with a mental note that they're 'saved'," says Stroh. "Instead, put them in an investment or savings vehicle that you determine beforehand." For example, set up your checking account to automatically transfer $100 into savings on the first of every month, without any additional effort on your part. You have the power to cancel a payment, though you may have to give plenty of advance notice to do this. But this extra step forces you to do more work if you choose to stop paying yourself.

Some people may not be able to completely automate their savings, but the benefit will be the same if they follow a savings routine. "My company pays me in cash (after taxes), so I don't have the automatic deposit option," say Bree Shannon, a Long Island, Calif.-based singer for a cruise line. "But I do write myself a check that goes into my savings account every pay (period)."

Whether you initiate an automated process or write a check, following a routine plan is the best way to save, says Lewis Mandell, professor of finance and managerial economics at the State University of New York in Buffalo. "It forces you to live on less money, which means that you scale down your expectations," he says. "After a while, you don't even notice that you're not spending as much."

2. Automate your debt
People are often more willing to pay their creditors than pay themselves. So even though your "income" isn't automatic, your "outgo" probably is. You can use this to your advantage, though, by setting up an automated electronic bill payment schedule for your debt. "If you have credit card debt, you need to pay it off. You're saving by paying that debt down," says Peter Bielagus, a financial adviser and author of "Getting Loaded: A Complete Personal Finance Guide for Students and Young Professionals."

"If you have $1,000 earning 4 percent (in a savings account), whereas your credit cards are losing 18 percent, then I'd much rather you pay down $1,000 on your credit card." Once the debt is paid, you can transfer that same monthly payment into a savings account.

3. Open CDs
Each time you get paid, open a three- or six-month certificate of deposit with a portion of your earnings. Check out the highest-yielding CD rates on Bankrate. Savings institutions usually require a minimum deposit of $1,000, but some accounts can be opened with only $500. Then renew them each time they expire. "If you constantly roll these CDs up (at the end of their terms), then you're constantly investing," says Stroh. You will likely be ahead of people who have direct deposit, especially if they park their money in a regular savings account with a low interest rate. And since these CDs are short-term, you can still access your cash in a reasonable amount of time should you face an emergency. "All you want to do is make it as hard and unpleasant as possible to get to your money," says Mandell. But don't make it impossible.

4. Start low, finish long term
Some people don't save because, after expenses, they feel they can't budget hundreds of dollars a month into a savings account. "But the point is to get started," says Bielagus, even if you start with a very low amount. "If you begin with $25 a month, and then after four months you increase it to $30, and four months after that increase it to $40, pretty soon you're going to be saving some serious money." Keeping a long-term view helps you realize the value of a small start. "You might not be able to predict your income for the next three months," says Stroh, "but you may be able to predict your total income stream for the next several months and years. Your budgeting, spending and saving should be done with that in mind."

5. Go for zero-based budgeting
The flip side of starting small with savings is to start small with necessary expenses. "Sometimes it's helpful to adopt an approach of not purchasing more than is absolutely needed until you've saved up the money," says Stroh. This method, called "zero-based budgeting," ensures that the focus is on how big your savings is each month, not how much you can spend. For example, instead of giving yourself a monthly clothing allowance, you may choose not to spend money on clothes at all for several months. Then, on a few occasions, you would tap into your savings to make clothing purchases. "It's more a matter of how much extra savings can be built up, and then using that savings toward a planned seasonal purchase," says Stroh. Sure, you are going to have a specific set of expenses each month such as rent or mortgage and food, but for discretionary purchases, practice saying "no" as you watch your savings grow.

6. Get real with your goals
You can't know if you're saving enough unless you determine in advance how much you want to put away, and that means setting targets. "When I go to bed, I have a legal pad next to me that lists my savings goals," says Bill Warren, a Realtor in Richmond, Va. "I'm constantly reviewing them." If you are not sure how much you should be saving, take a quick look at your last bank statement. Which types of businesses received the most of your money? How much did you spend with those businesses? Make that dollar amount your new monthly savings goal. You are more important than the services those companies provide.

7. Kid yourself
"If you cannot save for yourself, open up a savings account in the name of your kids," says Mandell. He reasons this is a great psychological way to stockpile savings when you have been unsuccessful doing it for yourself. "As long as the amount in the account is low enough to not be taxable under the kiddie tax law, it is a great way to save."

One way to avoid the kiddie tax altogether is to invest in tax-deferred 529 accounts for your children's future educations. These college-savings plans can be set up to accept payments automatically from your bank account, making saving a painless effort. True, there's a penalty if you tap into these accounts for noneducation purposes, but in a sense you're saving yourself the hassle of coming up with the money down the road when your children matriculate -- and better yet, sparing them from having to take out onerous college loans.

8. Spend more on your house
No, don't buy a bigger house. Just pay more on your mortgage. "Take out a 15-year mortgage," says Mandell. "This is an absolutely terrific way to trick yourself into saving." Instead of having your savings parked in stocks and bonds, it's parked in your real estate.

"I always recommend getting a shorter mortgage if you have difficulty putting away money. When my wife and I bought our first house, we obligated ourselves to make a payment that used up a very large part of our income," says Mandell. "We paid it off over three years. When you're obligated to make large house payments, you're obligated to save." Though large principal payments are a great way to create equity, Mandell does sound a warning: "Whatever you do, don't open up the other end of the package by taking out a home equity line of credit, or HELOC, because that undoes everything!"

9. Bank your bonuses
"When I get a bonus or holiday pay, I act as though I didn't get it and put the extra in my savings account along with what I regularly put in," says Shannon. Stroh agrees with this method. "Human nature is to spend (a bonus). A lot of consumers get lured into making purchases with it," he says. "But you really want to invest it."

10. Celebrate regularly
Keep a running tally of the amount of money you have saved, or paid down in debt, since the beginning of the year. As this figure balloons (or shrinks), it will help inspire you to keep up with your savings plan.

If you can succeed in your job, you probably already have what it takes to save regularly. "Many people (with irregular incomes) tend to be pretty good savers, because it's the only way you can survive in a job like this for very long," says Mandell. "Once you can get your money removed from your direct control, much of the battle is won."

A simpler way to save: The 60% Solution

Twenty years of complex budget calculations have led me to a simple conclusion: If you limit essential spending to 60% of total income, your savings will soar.
[Related content: budgeting, save money, financial planning, spending, bills]
By Richard Jenkins
MSN Money

How many of you have tried budgeting and think it's a waste of time? Come on, let's see those hands.

OK, that's just about everybody.

I've kept a budget of one kind or another, first on paper and then with the help of various software programs, for many years -- despite a strong suspicion that I was wasting my time. The illusion of control, I argued to myself, was better than none at all.

My approach to budgeting was to carefully track my spending during the month and to adjust my budget targets up and down in each category, so that my total expenses never exceeded my income.

Useful? Sometimes.

Anal-retentive? Probably.

After two decades of this, though, I started to wonder if there isn't an easier, more effective way to budget. I realized that the hardest part about keeping a budget is getting useful information from it. There's too much detail and not enough bottom line. My answer is the 60% Solution, a faster and easier way to structure your budget without having to account for every penny.

What you're trying to do with a budget is to prevent overspending, which ultimately leads to piling up debt. Contrary to the way most people budget, however, it rarely matters what you're overspending on -- dining out, entertainment, clothes. Who cares? It's still debt, right?

Looking at my own spending history, I realized that it wasn't the little luxuries here and there that got me in trouble. It was the large, irregular expenses, like vacations, major repairs and the holidays that did all the damage. To avoid overspending, I had to do a better job of planning for those.

And then there were the really big expenses: buying a car, putting a down payment on a new home or putting a new roof on an old home -- all of which can run into the tens of thousands of dollars. They also can often be postponed, sometimes for years, which theoretically should give me a chance to save for them.

Understand your committed expenses

As I looked back over the past 20 years of budgeting, I saw that there were a few years when my wife and I believed we were fairly on top of things, even with a much lower income. How did we manage?

The key was a drop in our fixed monthly expenses. It was a period when declining interest rates had lowered our adjustable-rate-mortgage payment to about 15% of our household income. That left us with some extra money each month to set aside in a savings account for those irregular expenses.

We later moved to a bigger house with a much bigger mortgage payment, higher maintenance costs and utility bills, and obscene property taxes. The monthly mortgage payment was only 20% of our gross income, far lower than the 33% that most lenders will allow, but, suddenly, we were struggling again.

Even after refinancing our mortgage at a lower rate, we were still often running out of cash before the end of the month. I realized that other fixed expenses had crept upward over the years. As my children, Natalie and Jackson, got older, they needed things like music lessons and sports equipment that added several hundred dollars a month to our basic expenses. They were also outgrowing clothes faster than we could buy them.

The slow but steady growth in our monthly spending commitments was putting a squeeze on our budget. I call these "committed" expenses rather than "fixed" or "non-discretionary" expenses, because things like music lessons are neither fixed in amount nor absolute necessities, but rather are commitments my wife and I made to provide for our children.
The 60% Solution emerges
After analyzing our spending patterns over a couple of years using our Microsoft Money data file, I determined that we needed to keep our committed expenses at or below 60% of our gross income to come out ahead at the end of the month.

Committed expenses:

* Basic food and clothing needs.

* Essential household expenses.

* Insurance premiums.

* Charitable contributions.

* All of our bills -- even such non-essentials as our satellite TV service.

* ALL of our taxes.

I'm not saying that 60% is a magic number. It's a workable goal for my family, and it's a nice round number. Your number might well be a bit higher or lower. At any rate, it's a good place to start.

Then I divided up the remaining 40% into four chunks of 10% each, listed here in order of priority:

Retirement savings. This consisted entirely of my payroll-deducted 401k contribution.

Long-term savings. Before I retired, this was also automatically deducted from my pay, I purchased Microsoft stock at a discount as part of an unusual stock-purchase program. The relative lack of liquidity (i.e. the difficulty of turning these shares into cash) made it harder to spend this money without some planning and a series of deliberate steps.

Short-term savings for irregular expenses. These were direct-deposited from my paycheck into a credit-union savings account. Money in this account was easily transferred into our checking account, as needed, via the Web. This was the money I looked to to pay for vacations, repairs, new appliances, holiday gifts and other irregular but more or less predictable expenses.

Fun money. We could spend this on anything we liked during the month, so long as the total didn't exceed 10% of my income.

You may have noticed that only 70% of my paycheck was used for everyday expenses. Because we never saw the other 30%, my wife and I don't miss it.

We didn't really need to track our expenses, because our checking account balance was generally equal to the amount of money we could spend. That's the way a lot of people do it, but they don't first make provision for savings.

Why the 10% solution is actually 90% wrong

Saving a tenth of your annual income is fine - if you can predict the future. The rest of us need a little more.
Money Magazine
By Walter Updegrave, Money Magazine senior editor
April 26 2007: 1:51 PM EDT

(Money Magazine) -- It's a rule of thumb that's been repeated so often it's become accepted wisdom: If you want to be financially set in retirement, you should save 10 percent of your salary each year.

The 10 percent solution has simplicity going for it. And the fact that it's invoked so frequently lends it a certain air of authority. But will following this strategy guarantee you a secure retirement?

I wouldn't count on it. Sure, like most rules of thumb, this one can work in some circumstances: If you start stashing away 10 percent of your income in retirement accounts at the beginning of your career and do so without fail year after year, you could very well end up with enough money to support a comfortable retirement.

But note the italics. In real life, as opposed to formulas, things don't always go so smoothly. Will you really get that early-bird start and stick to it religiously for upwards of 40 years? Even if you possess an iron will, there might be times when a broken-down car, orthodontia for the kids or a layoff can temporarily derail your savings plan.

So how much should you save, then? Well, you could use an online tool such as the Retirement Planner. By filling in data about your finances, you'll get a sophisticated analysis of how much you need to save to retire comfortably.

It's definitely worthwhile to do that, but remember that the result is still an estimate - a nuanced and complex estimate, to be sure, but an estimate nonetheless. It also takes a fair amount of time, which may discourage some. If you're like most people, you probably wouldn't mind a simpler answer that quickly lets you know if you're on track.

A recent study in the Journal of Financial Planning gives you just that. It tells you the percentage of income you must save each year given your current age, your income and how much you've already stashed away. The researchers calculate that savings rate on the assumption you'll retire with 80 percent of your pre-retirement income after deducting the money you save each year. After all, you're not actually living on the dollars you save, so you probably don't need to replace them after you've stopped working.

The main lesson in this study isn't exactly earth-shattering: The sooner you start, the less you must sock away each year. But when you look at the calculator and see just how huge the required savings rates can get for late starters, that lesson resonates a lot more.

Say you're 50, and you make $80,000 a year but have yet to save a dime. To retire comfortably, you'd have to begin setting aside 30 percent a year. Ouch! On the other hand, if you've been saving throughout your career and have, say, $300,000 in savings by age 50, the target rate drops to a more doable 15 percent.

But, as I mentioned before, these figures are only estimates. You may be able to retire quite comfortably while saving less if you're among the 20 percent of workers whose company provides a traditional check-a-month pension, you envision working part-time in retirement or you expect to tap the equity in your home through a reverse mortgage.

Or you may plan to live it up in retirement (or just want to be doubly sure you'll have more than enough to live on), in which case you may want to exceed these targets. Either way, know that the 10 percent rule just isn't enough.

Retirement: How much to save

Retirement: How much to save
Ten percent is better than nothing, but it's really only the beginning, our expert explains.
By Walter Updegrave, Money Magazine senior editor
January 8 2007: 12:06 PM EST

NEW YORK (Money) -- Question: I often see people recommend that you save 10 percent of your salary for retirement. Does that 10 percent include any employer matching funds? Or should you be saving 10 percent on your own aside from anything additional your employer may be adding to your 401(k)? - Mike, Lake Villa, Illinois

Answer: Like most rules of thumb, the "save 10 percent of your salary for retirement" doesn't get into details. It's not a formula based on an underlying economic truth. It's really just one of those bromides that's been repeated so often that it's taken on a life of its own.

So while saving 10 percent of your salary is better than saving less than that amount, this rule doesn't make up a serious retirement strategy. After all, even aside from the question you raise about whether the 10 percent includes employer matching funds, there are plenty of other issues this rule doesn't address that can dramatically affect your retirement security.

A quick example will show you want I mean.

Let's say you're 25, earn $40,000 a year and immediately start socking away 10 percent of salary into a 401(k) account. And just for argument's sake, let's say you keep this up for 40 years and that, over that time, you receive annual salary increases of 3 percent and earn an 8 percent annual return on your savings.

Well, in that case, at age 65, you would have a 401(k) worth just over $1.5 million. Assuming an initial withdrawal of 4 percent of your account's value - an amount that would allow you to increase subsequent annual withdrawals for inflation to maintain purchasing power and still have a reasonable assurance your nest egg will last 30 or more years - that would give you just under $62,000 from your 401(k) the first year of retirement.

That would be enough to replace almost half of your pre-retirement salary, which, with 3 percent annual raises, would have grown to about $127,000 by age 65. Throw in Social Security and you've probably got enough to live, if not lavishly, at least comfortably in retirement.

But there are a lot of assumptions here, all of which can change. What if instead of starting at 25, you didn't begin saving until you were 35? Well, if you still saved 10 percent, your portfolio's value would grow only to $900,000, giving you an initial draw of about $34,000, allowing you to replace less than 30 percent of your pre-retirement salary. If you didn't get started until you were 45, your portfolio would only be large enough to replace about 15 percent of your pre-retirement paycheck.

And what if instead of earning 8 percent a year on your investments, you earned 7 percent? Well, even if you still got that early start at age 25, your portfolio would be worth $1.2 million instead of more than $1.5 million, throwing off about $49,000 rather than $62,000, replacing just under 40 percent of your pre-retirement salary instead of half.

I should add that even these examples are incredibly imprecise for a number of reasons. For one thing, they assume you'll earn that 8 percent or 7 percent investment return year in and year out like clockwork. In reality, when you're investing in stock and bond mutual funds, your returns will jump around considerably from year to year, and that will affect the eventual size of your 401(k)'s value.
Which has priority? My 401(k) or Roth IRA?

And speaking of reality, what's the likelihood that you'll actually contribute 10 percent - or any amount for that matter - to your 401(k) every single year for 20, 30 or 40 years. Or that you'll get a 3 percent raise every single year? In the real world, there may be times when your salary remains flat or you miss contributing for several months or longer because you're laid off or you switch jobs or your economic circumstances require you to cut back your 401(k) contributions or maybe even suspend them entirely.

All of which is to say that if you're looking to create a real strategy for achieving retirement security, adopting the 10 percent rule leaves a huge margin of error. You could be on track to a comfortable retirement - or you could find yourself living a meager existence in your dotage.

That said, however, I wouldn't discourage someone from using the 10 percent rule of thumb as a first step. If nothing else, this is a quick way to get into the habit of regular saving, which is the single most important factor in planning for retirement.

But since 10 percent likely isn't adequate unless you get a very early start or believe you can count on other generous company perks - like a traditional check-a-month pension or employer-paid retiree health care, both of which are becoming increasingly rare - then I think it's a good idea to at least try to raise your target to 15 percent.

As for employer matching funds, I would not consider them part of the 10 percent or 15 percent or whatever percentage you save on your own.
Got a raise? Where to stash extra cash

In other words, you should try to do 10 percent or 15 percent or more even if your employer is also kicking in dough. Why? Well, for one thing, you may not be able to count on that match throughout your career. If you count employer funds in your savings target and then move to a company that doesn't give a match, you would have to ramp up your savings to compensate.

That would require you to scale back a lifestyle you've become accustomed to, which is difficult. Chances are you wouldn't save more, and you would begin falling behind.

Besides, I don't think that getting a generous employer match means that many people will end up saving way too much. In my experience, the opposite - saving too little - is the bigger risk for most people. All in all, I'd rather err on the side of having a larger nest egg than a smaller one.

One final note. The only real way to tell if you're actually headed toward a secure retirement is to do a more comprehensive analysis that takes into account such factors as how much you already have saved, how much you're saving on a regular basis, how your money is invested and then forecasts a nest egg you're likely to have and how much annual income you can reasonably draw from it in retirement.

You can do that sort of analysis at the Retirement Planner calculator on our site or, if you prefer, you can hire a financial planner to do the number-crunching for you. Of course, the financial markets and your personal situation can change over time, so it's good to do this exercise again every couple of years to assure you're still on track. If you're not, you can make adjustments like saving more, investing differently or even postponing your retirement.