Money is something that affects all of us, whether we like it or not. We all need it to survive, and it’s important to know how to manage it properly in order to live the life we want. Unfortunately, many people don’t know the first thing about managing their finances. They may have a vague idea of how much money they make and how much they spend, but they don’t have a clear picture of their financial situation or how to improve it. In this article, we’ll go over some important questions you need to be able to answer if you want to be financially successful.
How much money do you need to retire?
One of the biggest financial goals that many people have is to retire comfortably. However, most people have no idea how much money they’ll need to do so. They may have a vague idea that they need to save a lot of money, but they don’t know how much is “a lot.” The truth is, determining how much you need to retire is surprisingly simple. Assuming a four percent withdrawal rate, which is seen as a sustainable amount, simply multiply your expected retirement income by 25, and you’ll know exactly how much you need. For example, if your expected retirement income is $50,000 per year, you only need $1,250,000 in order to safely withdraw that amount each year. Thankfully, if you’ve done your research, you know that you don’t need to personally set aside $1,250,000. If you invest wisely, the majority of that money will be from investment returns, and the money you put in will only be a fraction of that. Those who are able to clearly answer this question are well on their way to a successful and comfortable retirement.
What are your expected investment returns?
Knowing what types of investment returns you can reasonably expect is critically important to know the answers to other questions. Being able to answer this question with certainty means you’ve done your research. The S&P 500 averages around 10 percent per year, with some years returning much more and some years being negative, but it’s typically viewed as a benchmark. The S&P 500 is a well-rounded option that provides market average returns. If you’re risk-averse and can’t stomach an average amount of volatility, your returns will suffer as a result. On the other hand, if you’re fine with assuming more risk, your returns could be higher than 10 percent. Regardless, you should have a general idea of what to expect, because this will help you determine other numbers, such as how much money you need to save and how much money you need to invest each month.
How much money do you need to invest each month?
You want to be rich, and so does everyone else, but you need to know how much money you should be investing in order to get where you’d like to be. It’s all right if you don’t yet earn enough money or your bills are too high to invest the amount you determined you needed to. You’ve come up with a figure, and you can focus on the issue of how to reach that goal. For example, you should be able to say, “I need to invest X amount each month in order to reach X amount by this time.” You can determine how much you should set aside by using a compound interest calculator and inputting the amount of money you currently have saved, your expected investment returns, and your timeline.
How much cash should you have on hand?
Having a sufficient amount of cash on hand is an important aspect of financial planning, but many people may not know how much they need to have stashed away in their savings account. In general, it is recommended to have three to six months of expenses set aside in a savings account with about two months of expenses in a checking account.
This recommendation is based on the idea that having a buffer of cash can help you weather unexpected financial storms, such as a job loss or a medical emergency, without having to rely on credit cards or other forms of debt. However, there is no exact science to determining how much an individual should have in cash reserves, as everyone’s financial situation is unique.
It’s important to consider your circumstances when determining how much cash you should have. For example, those with variable income such as those who work on commission, those who rely on gratuities, or people who are self-employed may need to have a larger emergency fund to account for fluctuations in income.
On the other hand, having too much cash on hand is also not ideal. Each month your money sits in a checking account earning little to no interest, it loses purchasing power due to inflation. Therefore, it’s important to strike a balance between having enough cash on hand to cover your needs and not keeping too much cash that could be invested to earn a better return.
In summary, while there is no one-size-fits-all answer to how much cash you should have on hand, a good rule of thumb is to aim for three to six months of expenses in a savings account and about two months of expenses in a checking account. However, it’s important to consider your personal circumstances and adjust accordingly.
