Precious treasure and oil are in a wise man's dwelling, but a foolish man devours it.
In personal finance, as in clothing, one size does not fit all. Exactly when to start activities like saving for retirement, college, or paying down a mortgage early are questions that are highly dependent on the particulars of the situation. What percentage of your income should be directed at a given project at a specific time in your life is even more problematic.
However, I believe there are some rules of thumb that at least work at least thumb of the time.
When to start savings?
No matter what your financial condition, start saving today. If at all possible, keep saving for the rest of your life, even in retirement. If you are broke and overwhelmed with debt, start an emergency fund today. Even $500 in a cigar box can mean the difference between an unfortunate event, like a flat tire, and a disaster that leads to an additional debt that is large enough to trash a tight budget for several months. If you can’t do any more than throw loose change into a drawer at the end of the day, do it. If you have anything you can live without, sell it. Put that money into your emergency fund. The ultimate goal is six months take pay in an insured account. Reaching this goal will take a long time. Don’t beat yourself up if the going is slow. Just keep saving.
Proverbs 13:11 ESV
Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.
Once your situation has improved to the point you are not reacting to emergencies on a weekly basis, pay yourself first. Before paying your bills, put aside a little something. The goal here is 10% of take home salary into savings. When the number in savings becomes sufficiently large, that money becomes your seeds for long term investments in taxable accounts. Again don’t beat yourself up about what you can’t do. Rejoice and thank God for what you can do. That is an important principle in every aspect of life.
When to start saving for retirement?
Generally, one should start saving for retirement as soon as you receive what you believe to be your terminal degree, high school, college, or graduate school. If your employer offers matching money, I would lean toward taking the free money even if you are still paying off bad debt, like high interest credit cards. You simply can not beat a 100% instantaneous return on your investment.
The goal is 15% of your pretax income into tax favored accounts. For most this would be a combination of 401 (k) and Roth IRA. The Roth came into the game a little too late to do me much good, however it should be a powerful weapon in the arsenal of those under 50 years old. Start with the free money. Gradually, over time increase your contribution. A good way to achieve this goal is bump your withholding every time you get a raise. This is a relatively painless way to reach 15%. If you try to reach this goal too quickly, you will end up needing the money for something else.
A slack hand causes poverty, but the hand of the diligent makes rich. He who gathers in summer is a prudent son, but he who sleeps in harvest is a son who brings shame.
When to pay off the mortgage?
I consider making extra payments to principal on your mortgage to be a critical component in any savings plan. Larry Burkett, the godfather of Christian personal finance authors, was fond of stating that if you hadn’t paid off your mortgage you did not have a retirement plan. I was so frightened by my 30 year mortgage I paid it off in less than 10 years. That was the biggest raise I ever receive in my life. I had close to $1,000 extra, every month. It is amazing the world of options that opens when you have an extra $1,000 in your hand.
Don’t talk to me about losing your tax deduction. If you have a mortgage, you are giving the bank $3.00. Then the Government returns $1.00. It is better to give the bank nothing. Give the $1.00 to the IRS and keep the $2.00 in your pocket.
Again use a little common sense. If you have 23% credit card debt or even 6% student debt get rid of it before going after the mortgage. If you have a 3% mortgage and inflation is running at 6%, don’t worry about it. If you have a 6% mortgage and the current thirty year rate is 3%, refinance. One size does not fit all.
When to start saving for college?
I view this as “nice to have” rather than a necessity like the emergency fund or a retirement plan. Your children may not want to go to college. It will be much easier for them to find money for college than it will be for you to find a retirement loan. Once you have everything else under control, start socking away surplus money into a 529 tax favored education account for your children, grand children, or even yourself. Once you put money into such a tax favored account, this money has to be used for education.
A good man leaves an inheritance to his children's children, but the sinner's wealth is laid up for the righteous.
When to give?
There is another part to the question of savings, when and how much to give. Obviously, you can’t save money that you have given away. Fortunately, I am a Christian. Christianity is a religion of freedom and grace, not rules and law. I will never tell you how much you need to give. That is a question that needs to be settled between you and God. That said, if you aren’t already giving, start giving today. If all you can manage is a handful of change into the plate or the Salvation Army kettle, start today. If you don’t have money, donate your time to your church or some worthy charitable activity. If you show up at one of these places they will find something for you to do.
Look into your own heart, your attitude towards giving will tell you a lot about your relationship with God. After all, as a Christian you are just a steward of your Lord’s resources. Most of us don’t live like that because in our heart we really believe that is my money, not the Lord’s money. That’s OK. If you have to pry the money out of your left hand with your right hand, that is a start. Just keep looking for ways to become a blessing. If you are faithful in little things God will soften your heart. Then you will be given the opportunity to become a true blessing in this unhappy world.
2 Corinthians 9:6
The point is this: whoever sows sparingly will also reap sparingly, and whoever sows bountifully will also reap bountifully.