Saving money is like running a marathon— it takes discipline, strength, and fortitude to make it to the end. There will be times where you feel you’ve hit the 20-mile wall and other times where you feel invincible. Completing a marathon is all about steady and consistent progress, and that can’t be done without adequate training.

How can you “train” your savings habits? I’d like to show you a few simple steps to get your savings strategy across that finish line.

Savings Tool Kit

In my 10/20/30/40 budget plan, I advocate for saving 20% of your after-tax income. This percentage is not always easy to attain, but it will help you reach many financial milestones you have in place. The goal of saving 20% comes from the idea of building up different savings accounts in order to protect you from an emergency or help fund a family vacation. Just as you don’t want to spend all of your money in one place, you also don’t want to put all of your savings in one place either.

Building up a few healthy savings accounts can help you with your financial goals. But which accounts should you establish and how often should you contribute to them?

Before you read any further, we recommend you download our Savings Hierarchy.  It will help you put the rest of this blog into action.

Part 1: Save For Emergencies

I strongly advise creating a separate emergency fund. An emergency fund should be a low risk, highly liquid account that is only touched when something goes wrong: a car problem, water leak, loss of a job, or unexpected medical issues.

It is best to have anywhere from 3-6 months of living expenses in an emergency fund. Start by evaluating your fixed expenses:

• House payment
• Car payment
• Loan payment
• Food
• Utilities

Add up the monthly cost of each item to get the number you will need, but it will often fall between 20%-25% of your after-tax income. Establishing an emergency fund should be your top priority. Once you have a healthy emergency fund, continue on to Part  2 and 3.

Part 2: Save 15% of After-Tax Income For Retirement

Saving for retirement will probably be your largest savings commitment. As retirement costs continue to increase, I recommend saving 15% of your after-tax income each month for retirement. There are many different designated retirement funds, but the most logical place to start is with an employer retirement plan.

Many working Americans have access to a workplace plan, which often includes the opportunity for an employer match. Many companies will match up to pre-determined percentage of your contributions as long as you meet the contribution requirement. Contributing the minimum required to maximize this matching benefit within your retirement account is a great place to start. It is important to contribute enough to get your employer match so that you are not leaving money on the table.

After your workplace plan contributions are set, turn your focus to your workplace Health Savings Account (HSA), if applicable. An HSA allows you to contribute pretax dollars into a fund to use for medical purposes such as surgery or another medical event. You can also continue to use the funds in your HSA during retirement when medical expenses often increase. Prioritizing your HSA provides great financial flexibility both now and in the future.

If after passing the maximum contributions for both your workplace retirement plan and HSA you still don’t reach 15% of your income you could consider opening an individual retirement account, or IRA. Providing additional retirement funding through a Roth IRA could be a great addition to your savings strategy. Different from a pre-tax workplace plan contribution, Roth IRAs are funded with after-tax dollars and are therefore not subject to income tax upon withdrawal (as long as the rules are followed).

There are income thresholds and other restrictions in place for opening a Roth IRA. If you find these restrictions apply to you, it is worth it to have a conversation with your financial advisor as there may be a different solution.

This retirement strategy has 3 pillars:

• Fund your workplace plan to maximize the employer match
• Max fund your HSA
• Fund a Roth IRA as appropriate

If you find you’ve funded each of the 3 pillars and still have room to invest, return to your workplace retirement plan.  At this level of income, you’ll want to speak with your advisor to ensure you’re using an appropriate mix of pre/post tax options.

By contributing to multiple retirement accounts, you provide yourself with financial flexibility and a sound strategy for steadily growing your accounts’ balances.

Part 3: Personal

After you have put 15% of your income into retirement channels, I recommend storing the remaining 5% of your after-tax income for your personal savings. You can use this 5% for anything you want: house, car, vacation, etc.

There are many places you can put this money:

• Traditional savings account
• Cash investment
• Stocks

Determining the right place for your money depends on two factors: your timeline and your risk tolerance. Assessing both of these points will lead you to make the most financially effective choice for you. The ultimate goal of your personal savings is to avoid debt when you make big purchases.

The End-Goal

Your savings strategy is going to be unique to your financial goals. The post above is meant to act as a guide, a part of your savings training plan but you can modify parts of it to best suit your goals and desires.

One of the toughest parts about a savings strategy is getting ahold of the bigger picture. If you would like to learn more about my overarching budgeting strategy, check out our 10/20/30/40 guide. We would love to help you reach your savings goals, give us a call and we will help you cross the finish line!