Hey everybody! Today’s post is my answer to a question I see asked a lot by strangers on the internet machine. What $ or % should I save each year/month/week? Now, there are people that will give you a pat on the back for saving 10% or 20% each year, but that’s not the mentality here. We want to live frugally and maximum our savings so that we can reach financial independence as soon as possible. I think setting a realistic goal that considers all relevant factors is important to measuring your success. Here’s what you need to do:
Step 1: Make a budget. This needs to be a realistic budget that you ideally have followed for a couple months. Make cuts where you can and add a buffer if you think it may be necessary. You don’t want to have excuses for not meeting your goals because of small unexpected expenses (etc: buying wedding gifts, needing a oil change, putting a deposit on an apartment). Use this as an opportunity to scrutinize all of your expenses. This budget should include rent/mortgage, insurance (car/rental/home/health), food/eating out, clothing, toiletries, gifts, fuel, travel, vacations, monthly memberships, internet, utilities, cable, minimum debt payments, etc. In my opinion, the shorter this list, the better. For the curious, you can see the budget I’ve been following for several months here.
Step 2: Figure out your annual tax liability. Oh, taxes, fun. It’s a necessary evil that definitely makes an impact. If you don’t believe me, look at this to see the numbers for yourself.
If you make a pretty steady amount, you can just look at your prior year taxes and use that amount. Be sure to include payroll (6.2% social security and 1.45% medicare), federal, state, and local income taxes. If you recently received a raise or don’t have documentation to determine your tax liability, here is a semi-quick way to calculate:
- Annual salary * 7.45% for payroll taxes. This will only differ if you make above the SS cap (2013 = $113,700)
- Federal taxes: Use this calculator. If you itemized last year, then grab your 1040 for the number, otherwise, use 0 for the standard deduction.
- State taxes: Use this link to determine your calculation.
- Local taxes: St. Louis has a 1% tax if you live or work in the city. Luckily, this doesn’t apply to me right now; however, you’ll need to do the research on this one, since I don’t know where you live. Feel free to leave a comment or PM me if you have questions on this.
Step 3: Subtract taxes and living expenses from your annual salary. This number is your maximum savings amount and should include pre-tax retirement accounts (Traditional IRA/401ks/etc). Ideally, this is the amount that you are able to use to pay down debt or put away for the future. If you’re not sure what to do with all this money, see this post about my current strategies for saving.
It’s really that simple! Three steps and you’ll have a realistic goal that you can measure your success against. If you prefer weekly/monthly measurements, then just divide the number by 52 or 12 and keep track of your progress.
Do you measure your savings progress? Do you have a goal? How did you calculate it?