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How Much Should You Save Every Month?

How Much Should You Save Every Month?

Millenials get a bad rap on a regular basis, and I’m definitely happy to be a defender of my generation in a few ways. Without slinging mud about our cohorts financial future I find it vital to talk about the very real metrics that we face in terms of federal entitlements being less reliable, not to mention the cost of living continually being on the rise. Life can be hard to plan when your adjusted wages and cost of living combine to squeeze you, and your probable student debt is so unreasonably burdensome. I would love to sit down and hash out all sorts of thoughts that I hold on these issues, but the fact is that you have to figure out a way to plan ahead. Saving money is not always easy, but this article below has a great narrative for opening your mind to what it could look like.

I personally plan to save a lot of my money to by investment properties, in part because that is what I know, but also because of the rate of return in the right investment properties (you are literally letting other people buy you a house…). All of that sade, this post is no sales pitch, it is a call to action for those who can relate to my own experience, and will experience the same future that I will, one way or another. So please enjoy this article, understand that it is maybe a little bit extreme, and that saving something is better than nothing – don’t let the perfect be the enemy of the good. If all you can save one month is $10 you should do it. If you don’t make a plan it’s not happening. And feel free to share or comment, I’d honestly love to discuss it further.

-Grady

 

How Much Should You Save Every Month?

More than income or investment returns, your personal saving rate is the biggest factor in building financial security. But how much should you save? $50 per month? 50 percent of your paycheck? Nothing until you’re out of debt or can start earning more money?

 

How much should you save every month?

Many sources recommend saving 20 percent of your income every month.

According to the popular 50/30/20 rule, you should reserve 50 percent of your budget for essentials like rent and food, 30 percent for discretionary spending, and at least 20 percent for savings. (Credit for the 50/30/20 rule goes to Senator Elizabeth Warren, who reportedly used to teach it when she was a bankruptcy professor.)

We agree with the recommendation to save 20 percent of your monthly income. But it’s not always that simple to suggest the right percentage of income for YOU to save.

If, for example, you’re a high earner, you’d be wise to keep your expenses low and save a much larger percentage of your income.

On the other hand, if saving 20 percent of your income seems implausible, or even impossible at the moment, we don’t want you to get frustrated. Saving something is better than nothing.

But if you want a shot at being secure through old age—and having some extra cash for things you want—the numbers suggest that 20 percent is the number you’ll want to reach or exceed.

 

Where should you save?

Opening an online savings account is a great way to start saving.  You’ll find some of the best rates online (vs. brick and mortar) and accessing your funds can be done from anywhere in the world.  Our favorite online bank is CIT, which has launched a Savings Builder Account with an APY of 2.45%.

In order to qualify for the 2.45% APY, you must either make a deposit of $100 per month (initial deposit to open is $100 as well) or have an ongoing daily balance of $25,000 or more.  CIT is trying to promote savings health, which is why to receive the very high APY, you must be willing to commit to saving money every month.

Ready to start saving? Compare today’s top saving account rates and open one today!

 

Why 20 percent?

According to our analysis, assuming you’re in your 20s or 30s and can earn an average investment return of five percent a year, you’ll need to save about 20 percent of your income to have a shot at achieving financial independence before you’re too old to enjoy it.

Here’s the thing: If you want to work like a dog every day until you die, maybe you don’t need to save all that much. Sure, you’ll still want an occasional vacation and something in an emergency fund in case your car coughs up a radiator.

Beyond that, however, we save so that one day we no longer have to work for the money. For most of us, that day won’t come for many decades, but there are regular working people who reach it as young as 40 or even 35.

What are you saving for?

True financial independence means that you can sustain your chosen lifestyle entirely from your investments’ interest and dividends.

How much money do you need to save to do that?

Good question. The simple answer: It all depends. It depends on whether you’re willing to live at the poverty line, need two homes and a sailboat, or fall somewhere in between. It also depends on how well your investments perform. If you can earn an average annual return of seven percent on your money, you can stop working with a lot less than if you only earn three percent.

For simplicity’s sake, we’ll use the common “four percent rule,” which states that, theoretically, you could withdraw four percent of your principal balance every year and live on this indefinitely. That means that you’ll need to save 25 times your annual expenses to become financially independent. (If the math doesn’t shake out for you, remember 25 x 4 is 100, and 100 percent = your total balance.)

There are problems with the four percent rule, of course. For one, there are no risk-free investments that yield anywhere close to four percent today. Sudden inflation could also become a problem. To account for this, and for simplicity’s sake, we’ll base how much you need to save based on your gross (before tax) income not your expenses.

In our example, we assume that you want to save 25 times your annual income, rather than your annual expenses. By default, you’ll actually be saving more than you need (because once you’re financially independent you could stop saving). But when discussing your source of income for the rest of your life, it’s best to be conservative.

 

How long will it take?

The chart below shows how long it will take you to amass 25 times your income based upon the percentage of your income you save. (We assume a five percent average annual return to account for a more aggressive asset allocation while you’re saving.)

How Much Should You Be Saving?
Percentage of Income Saved Time Required To Save 25x Annual Income
1 percent 100 years
2 percent 86 years
5 percent 67 years
10 percent 54 years
15 percent 46 years
20 percent 41 years
25 percent 37 years
50 percent 26 years
75 percent 21 years
90 percent 19 years

As you can see, by saving 20 percent of your income you’ll hit 25 times your annual income in just over 40 years. That means a 30-year-old who starts saving today (assuming no prior savings) will hit this target by 71. If you save less than 20 percent, it will simply take too long for your money to grow to a point where it will allow you to live off just interest.

It’s not that scary, we promise!

Remember that you only need 25 times your annual expenses, not your income, to become financially independent. The lower you keep your expenses, the sooner you’ll achieve your personal savings goal. Also, our savings chart doesn’t take taxes into account.

 

Tax-advantaged accounts can help

For simplicity, our chart looks at before-tax money going in, assuming that you’ll pay taxes on the money coming out. But tax-sheltered retirement accounts like 401(k)s and IRAs change that equation for the better.

If you take advantage of these accounts, you can get away with saving 20 percent of your net, or after tax, income.

If you qualify for a Roth IRA, use it! Money you contribute to a Roth IRA now comes back to you tax-free when you’re older, so the more you save in a Roth, the less you’ll need to save in total because you won’t have to pay taxes on the Roth withdrawals in retirement.

Contributions to a 401(k) will also help ease the pain of reaching a 20 percent savings rate, according to a TIAA-CREF blog focused on millennials.

TIAA-CREF assumes you can take advantage of at least a 5 percent match from your employer when you put money into a 401(k). This means you’ll really only need to save 15 percent of your paycheck.

Plus, if you are putting money into a 401(k), this money will be deducted from your paycheck before taxes which means that each dollar you deduct will save you some after-tax cash.

 

Getting to 20 percent—an example

Let’s say you make $1,200 every two weeks. After taxes, it’s $1,000. Your savings goal should be 20 percent of net (after-tax) income, or $200 from every paycheck.

If you make a pretax contribution to a 401(k) of five percent of your paycheck and it’s matched by your employer, that means you put aside $60 from your check before taxes (and your employer kicks in another $60). That’s $120 into your retirement account every month, and your after-tax paycheck is only reduced to $969.

You still owe yourself $80. You could put half into a Roth IRA for additional retirement savings and the other half to build up an emergency fund. What you do with it doesn’t matter as much as the fact that you saved it at all.

This means, after all that saving, your take-home income is still $889 every two weeks, which is only about 11 percent less than your previous paycheck of $1,000. By taking advantage of your employer match and pre-tax deductions, you managed to almost double your savings rate. Talk about bang for your buck!

Between pretax savings and employer matching, saving 20 percent of your paycheck gets a bit easier.

 

What if I just can’t save that much?

Don’t stress. Saving something is better than nothing.

I can already hear the shouts from the comments: “How ridiculous! I spend almost everything I earn, and on rent, food, and transport! This website is out of touch with its audience!”

Okay, okay. If the 20 percent scenario I just sketched out doesn’t fit your situation (which is going to be unique to you), then please don’t think that I’m saying you’re a failure or a chump. Like I said, we believe everyone should aim for 20 percent, not that everyone should hit that target on their first try.

Start small. Start with 1 percent. When that doesn’t sting so bad, go up to two, or even three. Maybe you hit 5 percent, and that feels pretty good. Maybe you take a crazy leap for 10 percent, and that leaves you stressed and strapped, so you scale back. It’s a process, a literal give and take.

Through it all, keep that 20 percent goal in mind. It’ll keep you from getting complacent. Whenever you get a raise, raise your saving rate! You were doing fine without that money before, and you shouldn’t miss it if you never get used to having it.

Finally, if you’re in debt, you might already be saving more than you think. That’s because paying down debt is essentially saving in reverse.

Think of it this way: One day, you’re debt-free. But you’ve been making big monthly payments to your debts for years. If you suddenly begin to save that money, what would your saving rate be?

Also, try investing

If you can’t save a good chunk of your paycheck every month, investing once (for right now) can help you start saving over the long run.

To get your started, our favorite investing platform is Betterment.

Betterment claims they’re the “simplest, smartest way to invest,” and we agree that they are. With Betterment your money will be automatically invested in index funds. But first, Betterment will ask you a series of questions to help determine your goals and risk tolerance.

You’re probably wondering: How much do I have to pay for all this? Actually, not as much as you might think. Betterment’s fee is simple—0.25 percent of your total portfolio. Compared to traditional brokerage firms, this is a whole lot less.

To get a better understanding of all that Betterment has to offer, here’s our full review.

 

I hit 20 percent—what’s next?

Keep going! As long as you’re not depriving yourself today, it’s difficult to save “too much”.

Take the same advice we gave to those who are struggling to hit 20 percent: Test your limits, and try to increase them. Building up strength (either physical or financial) takes discipline and consistency, as well as a willingness to listen to your body (or your bank account) when it tells you your current regimen is just too intense.

But saving more is definitely a good idea. Retirement experts say that the traditional recommendation of 15 percent of income is honestly too low to guarantee a comfortable retirement, and that 25 or 30 percent is a safer bet.

Also, keep in mind that if your goal is to retire early or someday leave a well-paying but high-stress job, your savings rate will likely need to be 50 percent or more. This may seem impossible, but it might give you pause when making major financial decisions like deciding how much house you can afford or what kind of car to buy.

The most important thing is to start saving. How much will vary from person to person, as well as from year to year. The best savings philosophy, in keeping with our sports metaphors, comes from Nike: Just do it.

Millennials Prioritize Owning a Home Over…

Millennials Prioritize Owning a Home Over…

As a millenial who owns a home and is soon getting married I don’t feel that this article speaks to me entirely, and I think that’s partially because the market that I live in is not exactly as extreme and unpredictable as more populous coastal cities. I have found that even though articles like the one below don’t fully describe my own environment they do point to something. I have many friends who are seemingly holding off bigger life decisions because of financial constraints. With that said, I find it very important to explain that the longer that someone owns a property the more their equity and personal wealth grows (and at an exponential rate). If somebody wants to take control of their own life in my generation one of the best ways would be to own their home. Even if they don’t use me to fulfil that process I recommend they do it. If you are a millenial and feeling a bit stuck it’s time to look at how your life would be different if you bought a reasonable/affordable house and lived in it for the next 5 years – but the longer you own it the better it is financially. OK, have a great day you crazy nuts!

Grady

Millennials prioritize owning a home over getting married or having kids

I spend more time than I would like to admit looking at real estate listings online. I recently found a nice townhouse in my neighborhood that costs 25 times my annual salary, which is honestly a better deal than most other places in the surrounding area. The moral of the story is that I’m convinced I’ll never be able to afford a home, at least not anywhere I’d like to live.

According to a new study by Bank of America, I’m not alone in my pessimism. Its annual homebuyer insights report, released on Wednesday, found that 72 percent of millennials, which the report identified as being born between 1978 and 1995, consider being able to own a home a “top priority” — more than traveling (61 percent), getting married (50 percent), or having children (40 percent). Millennials may be killing the housing market, but it’s not because they don’t want homes of their own.

Even if millennials are putting off having kids (which are expensive to raise) and weddings (which are expensive to have) to buy a home, a host of structural factors are getting in their way. High rent prices, student loan debt, and the toll of the 2008 financial crisis are all keeping young people from buying property. Some of these hurdles are purely psychological — naturally, a generation that grew up in the midst of foreclosures and evictions would be scared of buying property — but most are material. Young people spend a lot of money on student loans and rent payments, which keeps them from having money for, well, anything else.

Millennials spend too much money on rent

Generally speaking, young people prefer to live in cities, where both rents and property values are higher, according to a July study by the Urban Institute. The Bank of America report, which polled 2,000 adults who own a home or plan to in the future, also found that 90 percent of first-time buyers would rather find a place in their preferred location, which also drives up prices.

Nearly half the people polled by Bank of America said they spend more than 30 percent of their income on rent, meaning they can be described as being “rent-burdened.” Rent-burdened households have higher eviction rates and are more financially precarious than homeowners or renters who spend a smaller proportion of their income on rent, according to Pew.

It’s not uncommon for people to be rent-burdened in cities like New York or San Francisco, where rent prices outpace wages. This means they have less money left over that can be used for a down payment — and 53 percent of those polled said they’re waiting to buy until they have enough money saved up.

The massive burden of student loan debt

Ten percent of the 2,000 people polled by Bank of America say they have put off buying a home because of their student loan debt. This seems like a relatively small number, but other studies have suggested that student loan debt — especially when coupled with stagnating wages and rising property values — can be an insurmountable burden for young people who want to buy homes.

The average student loan debt in the US is $32,731, according to the Federal Reserve— and the collective student debt carried by all Americans hovers around $1.5 trillion. These high debt levels prevent millennials from purchasing homes, even if they really want to. A 2017 study by the National Association of Realtors (NAR) and American Student Assistance found that student debt delays millennial homeownership for seven years.

According to Lawrence Yun, a chief economist with the NAR, student loan payments prevent people from saving for a down payment or being able to afford a mortgage. “Sales to first-time buyers have been underwhelming for several years now,” he said in a 2017 statement. “Even a large majority of older millennials and those with higher incomes say they’re being forced to delay homeownership because they can’t save for a down payment and don’t feel financially secure enough to buy.”

That said, there’s no real way to win here. A June 2018 study by ApartmentList found that indebted graduates take four years longer to put down a first home payment than those who have no college debt — but those who didn’t finish college take even longer.

Kathy Cummings, the senior vice president of Bank of America’s Homeownership Solutions and Affordable Housing Programs, told me that college grads are generally better off than those without a degree. “Even though you take on the student loan debt, the earnings potential that you have is higher than if you just have a high school diploma,” she said. “The key is really completing that degree.”

The looming threat of another recession

Even if the economy has largely recovered from the 2008 financial crisis, young people haven’t. Materially speaking, the Great Recession widened the wealth gap between millennials and preceding generations, according to a May study by the Federal Reserve Bank of St. Louis. Millennials carry student loan debt, but also car and credit card debts that prevent them from taking on a mortgage — which is a “good” kind of debt that has the potential of appreciating in value.

And psychologically speaking, millennials are still feeling the effects of the Great Recession. One Morgan Stanley analyst told Business Insider that the financial crisis left an entire generation with a “significant psychological scar.” They’re scared of losing their jobs. They’re terrified of the stock market. And this feeling of financial precarity, coupled with a less than ideal financial reality, is keeping young people from buying houses.

“That fear is healthy,” Cummings told me. “That really gets you to the point where you’re making sure that you understand things before you move forward.”

She added that young people often believe “persistent myths” about buying homes, like thinking that they need a 20 percent down payment to have a home.

“There’s a lot of misinformation out on websites that encourage people to put down 20 percent,” she said. “Financially, it is a good practice, but it’s typically not necessary — especially in markets where there are increasing home prices, and there are currently affordable homes, it’s something to consider.”

“If you don’t have 20 percent down, there is absolutely an opportunity to pursue a mortgage,” she added. She also noted that some providers have 3 percent down payment requirements, some people may qualify for down payment assistance programs, and you don’t “need to have a perfect credit score” in order to qualify for a mortgage.

For recession-scarred millennials, though, the idea of buying a house with less-than-perfect credit or a small down payment may not sound like the smartest financial decision. After all, the people who took out subprime mortgages in the years leading up to the 2008 financial crisis were evicted from their homes; the banks that approved those mortgages were ultimately fine. And for those who can’t scrape together enough money for a down payment of any kind — or who are too scared of another financial crisis to take out a mortgage when they don’t have enough money saved up or have a lower credit score — putting off other major milestones is seemingly the answer.

Millennials aren’t intentionally killing homeownership, or marriage, or having kids; they just don’t feel like they can afford it.

400 Years of American Houses, Visualized

400 Years of American Houses, Visualized

I just saw this little ad pop up for this poster about all of the different styles of houses over different eras in American history, and I’m buying it to hang up in my new office space. I just thought that there would likely be a few of you out there who would enjoy it and want to buy one for yourself too.

Grady

 

400 Years of American Houses, Visualized

Sweet home, homie.

From post-Medieval English to McMansions, domestic architecture in the United States is as diverse as its denizens. A new poster from Pop Chart Lab makes identifying them easier and offers a glimpse of over 300 years of design history in a single, beautifully illustrated graphic.

The Brooklyn-based poster company, founded by Ben Gibson and Patrick Mulligan, has earned its cred by sleuthing often overlooked information and presenting it in a beautiful way. (Co.Design detailed Pop Chart Labs’s formula for success here.) The company has tackled compendiums of basketball jerseysApple’s history, and beer, among others. There’s an insatiable thirst for infographics—someone should do a poster about that!—and Pop Chart Lab has carved itself a nice little niche.

“After the success of our two prints celebrating the architectural achievements of iconic structures around the world—The Schematic of Structure and The Splendid Structures of New York—we decided to examine the elegance of the home,” the team at Pop Chart Lab said via email.

The designers embarked on a comprehensive research project to discover the changing traits of houses—how the rooflines morphed through the decades, how architects mined the past for new styles, and how the houses we come to know today evolved from a complex lineage. Because there was an information surplus—far too much to fit into one poster—they honed in on single-family residential architecture in the United States from 1600 to today. Virginia Savage McAlester’s Field Guide to American Houses was the main reference.

Those with a knack for history might recognize the iconic Vanna Venturi house as a representative for postmodern design, Frank Lloyd Wright’s Fallingwater for Organic, and the Gehry Residence for Deconstructivism. And those with a razor-sharp memory might be able to ID the houses they lived in. (I grew up in a spot that’s a dead ringer for the Spanish-style ranch that’s illustrated.) Pop Chart Labs hops the poster fosters “a general appreciation and respect for American design evolution for the home over the past 400 years” and that viewers will “learn more about an interesting topic that we see in everyday life.”

Now go find out what style your house represents and purchase the poster for $29 from popchartlab.com.

Have You Registered Your Storm Shelter?

Have You Registered Your Storm Shelter?

With tornado season approaching central Oklahoma it’s time to make sure that your storm shelter is registered with the municipality in which you live. If you live in Norman like me then you need to visit the link below to make sure that you’ve registered. This has been your friendly reminder that you and your loved ones are worth the few minutes it takes to register.

Register Here

If you are wanting more information about storm shelters I would recommend doing your own research, but here is a little clip to maybe get the ideas swirling a little bit.

4 Ways Investors Can Help Alleviate the Affordable Housing Crisis (& Make Money)

4 Ways Investors Can Help Alleviate the Affordable Housing Crisis (& Make Money)

As the world increasingly migrates into urban areas housing prices for most people have increased a significant amount. It’s nice to hear that there are people trying to plan ahead so that we can alleviate some of these financial pressures. This isn’t to say that these things are being figure out quickly enough, but I am encouraged that creative capital is being spent in this way. Have you heard any stories of people coming up with ideas like those listed below? If so I’d love to hear about them.

Grady

 

4 Ways Investors Can Help Alleviate the Affordable Housing Crisis (& Make Money)

Unless you live under a rock, you know all too well that there is an affordable housing crisis underway. And indications are that it is going to get worse before it gets better. I recently ran across some stats that paint a pretty dismal picture. One study estimates we’ll need an additional 4.6 million new apartment households by 2030. This equates to 325,000 new apartments needed annually to keep up with demand. Unfortunately, the number of new apartments projected to come online is about 70% of what is needed. Add to that an already low supply of affordable units and minimal government incentives, and we’ve got an ever-widening affordability gap.

However, as is often the case, where there are challenges, there are also opportunities. The affordable housing shortage presents not only opportunities for good investments, but also the opportunity to make an impact (that is, investments that will make you money and do good socially and environmentally).

If you have a genuine concern about the affordable housing crisis and want to be a part of the solution, read on. Here are four ideas on ways real estate investors can help alleviate the affordable housing crisis—and make money in the process.

4 Ways Investors Can Help Alleviate the Affordable Housing Crisis

1. Crowdfunding

Real estate crowdfunding is relatively new but gaining in popularity. Most readers of this article are likely to think of direct investment when it comes to real estate—buying a property ourselves to do a fix and flip or long-term rental, or investing in a specific project via private money loans.

But most of us are limited in the number of projects we can invest in at any one time. Crowdfunding expands the reach of individual investors and opens real estate investing to a much broader range of individuals. Some platforms have minimum investments as low as five dollars. With crowdfunding, the investor can often specifically invest in projects that will bring more affordable housing online. So, even though you may not have the funds to fix and flip a new affordable housing project on your own, with crowdfunding you can be one of several investors who help get the project off the ground.

Also, unlike direct investment that involves owning and managing property (and all the headaches that come with), crowdfunding is passive so you put your money to work without the stress and sweat equity that comes with owning property.

crowdfunding-benefits
Related: Why I’m Investing in Affordable Housing for the Long Haul

2. Investing in Homeownership

Another take on crowdfunding, these funds are made up of pools of distressed mortgages. These funds use investor money to purchase pools of distressed mortgages and then work with homeowners to find solutions that will keep them in their homes.

When you invest, you are helping not only individual homeowners but also the community by positively impacting affordable housing in the neighborhood. You make money by receiving returns from the profits.

3. Tax Reform and the Opportunity Zones Program

You’ve probably heard about Opportunity Zones, but just in case you aren’t up to speed on this program, here is a quick overview. Opportunity Zones are a new economic and community development program established by Congress in the Tax Cut and Jobs Act of 2017. The purpose is to encourage long-term economic development and housing investments in low-income communities nationwide.

The law provides for the creation of “Opportunity Zones,” which use tax incentives to attract long-term investment to neighborhoods that are continuing to grapple with high poverty and lackluster job and business growth. Housing experts and government officials believe investment in Opportunity Zones will help prompt development of affordable housing.

Related: How the Dire Future of the Retail Market Could Solve the Housing Affordability Crisis

Projects in Opportunity Zones will be eligible for funding through Opportunity Funds. Opportunity Funds are investment vehicles set up specifically for investing in eligible property located in an Opportunity Zone. Opportunity Funds require that the investor use the gain from a prior investment for funding the Opportunity Fund.

Opportunity Funds create benefits for both investor and community. Investors who are socially conscious can put their money into the communities that need it most. Investors also benefit from tax advantages. Opportunity Funds allow investors to defer federal taxes on any recent capital gains until December 31, 2026, reduce that tax payment by up to 15%, and pay as little as zero taxes on potential profits from an Opportunity Fund if the investment is held for 10 years.

You can invest in an Opportunity Zone anywhere in the country, but if you are interested in keeping it local, you can find Opportunity Zones in your area by going to Opportunity Zones Resources and in the Federal Register at IRB Notice 2018-48. In Minnesota, where I live, 128 Census Tracts have been designated as Opportunity Zones.

4. Affordable Housing via Fix and Flips and Long-Term Rentals

There are direct opportunities for real estate agents, investors, and builders to be more socially conscious and to have a positive impact on affordable housing through regular business dealings. With a little forethought and planning, a lot can be done to help reduce expenses when building and rehabbing homes. Homes can be made more energy efficient, safer, and designed to incur less tax. All of these can benefit potential homeowners and make housing more affordable to more people.