AAR27 - How do I decide how much to save?

What It Covers

Evan Ray presents a solo episode detailing how to allocate savings across different accounts using percentage-based budgeting, covering the 50/30/20 rule, must-have savings priorities, and specific account recommendations for retirement and emergency funds.

Key Questions Answered

• •Percentage-based budgeting: Work in percentages of net income rather than dollar amounts to create sustainable savings habits regardless of income level. Start with 50% needs, 30% wants, 20% savings, then adjust based on personal circumstances and financial goals over time.
• •Must-have savings hierarchy: Prioritize employer 401k match up to the full percentage (instant 100% return), then Health Savings Account contributions (triple tax advantage), followed by home equity if applicable. These accounts provide guaranteed returns or tax benefits that outweigh other savings options.
• •Roth IRA flexibility advantage: Max the $7,000 annual contribution limit when possible because contributions (not gains) can be withdrawn penalty-free anytime, making it more accessible than 401k funds while still providing tax-free growth. Calculate leftover budget percentage and direct it here first.
• •Four-zero-one-k budget adjustment: When calculating savings rate, approximate the after-tax value of pretax 401k contributions (subtract your tax rate percentage) and add back to net income. This prevents artificially inflating your savings percentage when comparing pretax retirement contributions to post-tax spending categories.