Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.
It might not have quite the same poetry to it, but just as the old Chinese proverb says, “a journey of 1,000 miles begins with a single step,” the journey to a comfortable retirement begins with a few minutes of annoying paperwork. Really, no good savings plan can be undertaken without the right accounts in which to deposit savings. And be warned: You’re going to need more than just a savings account.
First thing's first
Do you have an emergency fund yet? If you’ve ever read the Book of Job or watched the local news, you know terrible things happen to very nice people, so you should absolutely have at the ready an emergency fund that will cover at the very least three months of you (and your family’s) expenses. This — along with eliminating any large credit card bills — must be undertaken immediately, to prevent having to rely on high-interest credit in the event of an emergency.
One piece of advice: make this nest egg a savings account, money market account, or savings investment account, that’s totally separate from your checking account since it’s awfully tempting to transfer savings into a checking account to cover bills. (So no, Netflix being suspended never counts as an emergency.)
Retirement savings plans
We're generally not super-fans of financial aphorisms, but “pay yourself first,” is a solid exception. It simply means that, every payday, before you buy the first round of drinks for your freeloading coworkers, you should first put money away for your future. After your emergency fund is taken care of, move on to funding only “tax-advantaged” savings plans; tax-advantaged simply means that by either allowing your investments to grow tax-free or allowing you to defer paying taxes until retirement, the government is essentially handing you free money. Here's our own financial aphorism: “Grab as much free money you can.” So where should you look first?
Employer pension plans:
If you’re a full-time worker, there’s a pretty good chance your employer will offer a 401(k) plan, and they'll likely agree to either contribute a set amount every year or match a portion or all of whatever you contribute towards your retirement. 401(k)s are tax-deferred, meaning you’ll only pay taxes on your contributions when you retire, and won’t pay a cent on any investment gains made along the way. So between the government tax breaks and employer contributions, it’s like being deluged with money from a two-headed shower. You’re currently free to contribute as much as $18,500 a year ($24,500 if you're 50 or older), and you absolutely should contribute the maximum if at all possible; auto transfers from your paycheck will ease the discomfort.
If you aren’t offered a pension at work, or you’ve maxed it out, you should immediately fully fund your traditional IRA, SEP-IRA, and/or your Roth IRA before looking to deposit savings anywhere else.
Savings plan formula
Those looking to create an overall masterplan for their finances would do well to consider the 50:30:20 rule, which provides a roadmap to create comfort — even wealth — for your future retired self. The first step is to figure out what your take home, or net pay, is then divvy it up this way.
50% goes to needs. This is the non-negotiable stuff, including rent or mortgage payments, groceries, and monthly health insurance premiums. This one tends to be the toughest one for younger people; recent studies have shown that millennials devoted a full 45% of their income to rent before turning 30. So understand that these are just guidelines meant to help you, not turn you into a blubbering ball of anxieties. Just do your best.
30% goes to wants. This here is the fun percentage, the one who shops for clothes, vacations in sunny climes, dines out, may even drink one-too-many on a Friday. All non-necessary expenditures fall under this umbrella.
20% goes to savings. Though this percentage may be listed last, don’t forget what you learned above: “Pay yourself first.” So even before paying rent, you should first concentrate on using this 20% to eliminate your credit card debt, building an emergency fund, and putting as much as possible into your tax-advantaged retirement accounts.
How much should you save a month?
Ideally, you should be saving 20% of your net pay every month. If you carry no credit card debt and have 3 months of emergency expenses saved, this 20% should either go towards your work retirement account or deposited directly into a tax-advantaged pension or retirement account.
Weekly savings plan
Let’s get down to brass tacks, nitty-gritty, whatever folksy way you want to label a discussion of actual dollar figures. If your salary is $70,000, you’re making about $1,350 a week gross, but you actually bring home about $1,100 after taxes. Twenty percent of that is $216 a week. Manageable, no? If you’re not already taking that 20% off the top by contributing to your retirement plan at work, auto-depositing is a great option. You can easily link your checking account to a savings account that can serve as your emergency fund, or else straight into your own self-managed pension.
Ready to get started investing? When you take our risk-free survey, we'll provide you with a personalized investment portfolio to suit your needs and provide you with expert advice along the way. What are you waiting for — get started investing with Wealthsimple.
Spend & save with one accountStart saving