Once you determine what your financial goals are, it is time to determine steps to fulfill them. For instance, you can set up an automatic deduction from your paycheck in line with your desired saving amount. A generally good rule to live by is the 50-20-30 rule: 50% of your income should go to essentials, like food, rent, transportation, etc., 20% should go to savings, repaying debt, and investing, and 30% is for discretionary spending, which gives you some room to splurge on things you want or even for one-off unplanned expenses!
There are several different ways to determine how much you should be saving for retirement. A common guideline is that you should aim to replace 70% of your yearly income before retirement. You can get to this number by combining your savings, investments, Social Security benefits, and other sources of income (like renting a house you own, part time jobs, etc.). It is important to note that once you retire, your budget will not require to be split into the same expenditure categories. For example, after retirement you will not need to allocate to retirement savings or an IRA, but you might want to allocate a bigger proportion of your budget to healthcare expenses or traveling.
A general rule of thumb is to save 15% of pre-tax income for retirement through your 401k, IRA, and employer contributions. Make sure to take advantage of employer contribution matching so that you are not giving up any free money (of course, expenses and personal circumstances permitting)!
Try to meet your employer’s contributions to their maximum: if your employer matches half of your contributions up to 5% of your income, and you save that 5% into your 401k, that means 7.5% of your income will be contributed into your 401k. The maximum you can contribute to your 401k changes per year so be sure to be mindful of this amount. At the moment, it is $19,500 for your 401k and $6,000 for your IRA. Also worth noting that if you are over 50 years old, you can make higher dollar contributions on an annual basis. This “catch-up” contribution boost lets you save an additional $6,500 more into your 401k and $1,000 more into your IRA.
As emphasized before, it is extremely important to start saving for retirement as early as possible regardless of the total amount you are able to contribute. Even a $1 investment can grow to much more by the time you reach retirement depending on the age at which you start contributing.
How much could your $1 investment be worth when you reach an age of 65? This scenario analysis assumes an annual 4% return after inflation in today's dollars and does not represent any particular investment.