How do I know if I'm saving enough money?

John W. Schoen Senior Producer • Profile • E-mail

This is the time of year when most people lean a little more heavily than usual on their credit cards. Steve in Indianapolis has a different problem: he's trying to figure out how much he needs to save in order to have enough money to retire. Meanwhile, Donald in Niagara Falls is wrestling with the age-old question: just how cold should you keep your refrigerator?

How do I know that I am saving enough out of every check? I have 10 percent withdrawn into my 401(k) bi-weekly, put $100 bi-weekly into my savings and the rest goes into my checking. After my savings gets high, I put it in 4-month CD's. Right now, I have $10,000 split up between five staggered 4-month CD's, about an additional $2000 in savings and $3500 in checking with my major bills being rent ($450 a month) and my car at $300 a month. But I do not know if I should be saving more. I want to make sure I have enough money when I retire. I just turned 24 years old and am pretty sure Social Security won't be around, so how am I sure? Is this enough?
Steve, Indianapolis, IN

Unfortunately, there is no “magic formula” to determine whether you’re saving enough — especially when you’re 24. There are just too many other questions that come first, including: will you have a family? And if so, how big? How much of your savings will you decide to devote to the purchase of a home? Or college education for kids?

But take heart: even older savers have a tough time with these “other” questions, like: how long will I want — or be able — to work? How much will it cost me to live when I’m retired? And, worst of all, what kind of health care costs will I face (in your case 35 or 40 years from now)?

The mistake many people make is giving up before they get started, and assuming “things will work out.”  So 10 percent is a nice round number and a great starting point. As your salary increases, so will your savings. If you can train yourself to live on 90 percent of what you make, you should have no trouble setting aside a substantial nest egg. (As you get older, with more financial responsibilities, that discipline may get harder to adhere to.)

You also may want to reconsider where you put your savings. Stashing your money in CDs is a great starting point. (These days it's also a good idea to keep six months worth of current living expenses in cash, in case of an emergency — like a job loss.) CDs or Treasuries are a good place to put savings for short- or intermediate-term goals, like the down payment for a house.

But if your investment horizon for retirement is 35 years, your savings could be working harder for you if you took on more risk with, say, a mutual fund that invests in stocks. Not all funds are the same: so decide how much risk you feel comfortable with first, then pick a fund that matches your chosen risk level.

No one can tell you how much risk is “right” — what matters most is what you feel comfortable with. But keeping your money in CDs carries a risk too: that inflation will rise again and your savings will slowly be eroded.

And don’t give up entirely on Social Security. Much of the rhetoric about the trust fund’s financial difficulties was overblown by politicians who want to “privatize” the program — which means do away with it entirely. (That’s not true for Medicare, which is in serious financial trouble and will hit the wall much sooner unless some serious changes are made.)

In the meantime, you’re off to a great start. Keep it up!

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