Ah, the new year: The perfect time to take a look at your finances, outline your monetary goals, and resolve to work towards them. But where to start?
The possibilities are overwhelming… and the internet is flooded with slightly varying pieces of advice about how to save, invest, and spend, making it easy to get lost in the details. But there are some broad, generally accepted rules about what you should be doing with your idle money.
We reached out to financial experts through the Financial Planning Association (FPA) to find out what the best and most basic rules of thumb are to help you achieve your fiscal goals.
Saving for Retirement: 10% of your salary
An overwhelming majority of the experts we heard from agreed: The best financial rule to live by is to save at least 10% of your salary for retirement.
“My #1 rule of thumb is to build your lifestyle around the goal of being able to save at least 10% of your income, and to stick with that target through the years as your income fluctuates,” said Portland, Oreg.-based certified financial planner (CFP) Theodore Haley.
Ideally, you would put that amount towards a retirement investment account, like a 401(k), a Roth IRA, or a Roth 401(k), depending on what you’re eligible for. If your company offers to match your 401(k) contribution — meaning it offers to put in a certain amount every time you put in a certain amount — take them up on it, but don’t count that towards your 10%.
Contribute at least as much as they’re willing to match and put the rest of your 10% in one of the other two types of accounts. And remember that you can increase that 10% as necessary.
“If you are starting after age 35, that percentage has to be higher [just] as it does if you want to retire before age 65,” said certified financial planner Kelly Graves, based out of Charlotte, NC.
Keeping Your Bills at Bay: 6 months’ worth of expenses in the bank
What do you have in the bank right now? If something were to happen to you or a loved one, would it be enough to keep you comfortable for half a year?
“Keep 6 months of living expenses in cash in the bank, preferably in a high-yield savings account,” said Houston-based certified financial planner Michelle Gessner.
As the name suggests, a high-yield savings account offers a particularly high return on any money that sits in it. So while a typical account might yield .1% of your savings each year, a high-yield savings account like the ones offered by Ally or Betterment will give you a rate closer to about 2%. And that can add up for a large sum of money, like an emergency fund.
So if the goal is to have three to six months of living expenses in the bank in case of an emergency, a high-yield savings account could help you get there faster. Just be sure that the money is easily accessible and liquid (i.e. ready to be converted to cash).
Paying for a Home: 30% of your salary (and no more)
“Housing expenses should not be more than 25-30% of your take-home pay,” said Indianapolis-based certified financial planner Drew Feutz.
Experts vary on the exact percentage, but most agree that you shouldn’t be spending more than a third of your salary on home-related things. And that includes the cost of the house, property taxes, and homeowner’s insurance, as well as repair and maintenance (e.g. lawn or roof care, replacing old systems, electrical issues, plumbing).
So if you already own a home, see where you fall in relation to that range and adjust some outside expenses as necessary. And if you’re in the market for a new home, set your budget accordingly.
“Don’t let something that’s supposed to be a blessing become a burden,” said Feutz.
Pro tip: Automate, because you can’t trust the ‘you’ in New Year New You
We all know that new year’s resolutions are notoriously hard to keep. The good thing about financial planning today, is that once you make the initial decision to be smarter with your money, you can just remove yourself from the equation by going into your settings and opting for automatic transfers.
“Hands down, the most effective advice for accomplishing almost any financial goal is to automate, automate, automate,” said Denver-based certified financial planner Andrea Blackwelder. “Capitalize on your motivation when you have it by scheduling the contributions, putting them on auto-pilot, and removing the opportunity to mess it up!”
For more investing tips, check out Money’s 2020 picks from the pros.