How much do you really need to save?

Saving money is no small task. It’s usually helped along by a smart budget and a bit of personal dedication. It requires some sacrifice. It can be challenging and rewarding in equal measure. And it’s admittedly not the most fun thing in the world.

There’s really no such thing as over-saving (unless you’re putting your day-to-day health and wellbeing at risk), but it’s fair to ask when you’ve finally saved “enough”. To understand that, you need to know what you’re saving for.

Emergency savings

At a minimum, you should have enough money available (and easily accessible) to cover three months’ worth of expenses. Six months’ worth is better, but three is a solid beginning. How do you arrive at that figure?

Start with living expenses. Add up three months’ worth of rent or mortgage payments. Look at your utility bills and add three months’ worth of each to the total. For more variable bills, like electricity and heating, use numbers from the more expensive months in your calculations. Use receipts and bank statements to find out what a typical month of groceries and dining out costs you (keep in mind, if your income does suddenly stop, you’re very likely to start spending significantly less than you currently do).

Keep in mind that thanks to inflation, those figures will always be going up. So once you’ve put together an adequate amount of emergency savings, you should ideally review that amount once a year to make sure it’s still sufficient to cover your needs.

Finally, emergencies can happen at any time, so make sure you can access your emergency savings at any time – and hopefully with little to no penalty.

College

By the time a child born today is ready for college, four years at an in-state public university is going to cost around $100,000. So it’s pretty reasonable to want to get a head start on savings.

Saving for college, however, should probably be on the lower end of your priorities, well behind building up an emergency savings account and saving for retirement. Thanks to the ready availability of financial assistance and tuition loans, it isn’t a necessity to have funds saved up in advance.

Your best option may be to open up a 529 plan, which include helpful tax breaks, can receive contributions from anyone (making them a nice gift-giving option), don’t expire, and can even be cashed out without penalty if your child gets a full scholarship.

House

You could theoretically purchase a home with no money down, but that’s far from ideal. Without getting too bogged down into the science of mortgage rates, the more you can bring to the table as a down payment, the better off you’ll be. A sizable down payment means more initial equity for you and less risk for the lender, which can help you get more favorable terms.

In that sense, the more you can save for a down payment, the better. But if you’re looking for a number, you should really try to make a 20 percent down payment your goal. Why 20 percent? The answer is Private Mortgage Insurance, or PMI.

Lenders require PMI on any mortgage that represents 80 percent or more of the home’s value. This insurance is to help protect lenders against a potential foreclosure and it can be costly – it may run as high as 1.5 percent of the loan value per year, depending on your credit score and other factors. It’s a cost you can avoid by saving enough for a 20 percent down payment. You can use listing sites like Zillow.com to see what the median sales price is for homes in your target area and determine how much you need to save in order to get your 20 percent.

Retirement

Most retirees require between 70 to 90 percent of their pre-retirement annual earnings in order to live comfortably during their retirement years. So if your income were around $100,000, you would need – at minimum – around $70,000 (per year) in savings. That “per year” bit is a little hard to quantify, because (not to be grim or anything) you don’t necessarily know how long you’re going to live.

In the United States right now, the average age of retirement is 63. Life expectancy is currently 78.8 years. For the example above, a retiree would want a nest egg of at least $1,120,000. Which is a lot. It’s also completely achievable if you start early and make a concerted effort to save regularly throughout your adult life.

You can use the figures above to help you get a sense of what you’ll need to build up, but keep in mind that inflation will impact both your future earnings and the future cost of goods and services. If you haven’t already, it may be a good idea to work with a financial advisor to help you sort out a plan to get you ready for retirement.