Question

You and your friend Maria are 21 years old. Maria just started her first job in construction. She knows saving is important, but she isn’t sure where to get started. Right now, Maria’s main goals are to build an emergency fund, since she doesn’t have any savings, and start saving for retirement. Her take-home pay averages $2500 per month, although it varies based on her hours and opportunities for overtime. Each month, she pays approximately $270 towards her student loans, $900 on rent, $220 on healthcare, $130 on transit, and $500 on food. She comes to you to ask for advice on her savings plan. Write your suggestions to Maria. Make sure you address the following questions:

1. Ideally, what percentage of her income should Maria aim to save overall?
2. What savings goals are included in that percentage? What barriers might Maria face when trying to save more?
3. What strategies would you recommend Maria use to meet her savings goals?
4. What account type would be best for Maria to save for her long-term goals, like retirement? Why?

Answer 1

Maria should aim to save at least 20% of her income overall, with 80% allocated for expenses and 20% for savings. She should include building an emergency fund and saving for retirement in her savings goals. Strategies such as automatic transfers, budgeting, and increasing income can help her meet these goals. A retirement account, like a 401(k) or IRA, would be best for saving for long-term goals like retirement.

Step-by-step explanation:

1. In order to determine the percentage of her income that Maria should aim to save overall, we need to first calculate her total monthly expenses. Adding up her monthly expenses, we have: $270 (student loans) + $900 (rent) + $220 (healthcare) + $130 (transit) + $500 (food) = $2020.

Next, we can calculate the percentage of her income that she needs to cover her expenses: ($2020 / $2500) x 100 = 80.8%

Since Maria wants to save for both an emergency fund and retirement, it is recommended that she aim to save at least 20% of her income. This would leave her with 80% for expenses and 20% for savings.

2. The savings goals included in that 20% savings percentage are building an emergency fund and saving for retirement. The barriers that Maria might face when trying to save more could include unexpected expenses, fluctuating income, or lifestyle inflation.

3. To meet her savings goals, Maria can use strategies such as setting up automatic transfers to a dedicated savings account, creating a budget and tracking expenses, reducing unnecessary spending, and finding ways to increase her income.

4. For Maria's long-term goals, like retirement, it would be best for her to save in a retirement account, such as a 401(k) or an individual retirement account (IRA). These accounts offer tax advantages and are specifically designed for long-term savings.