What is exactly "savings" in my situation?

Question

People always say "save X percentage of your income". Is that before or after tax income? Am I savings enough in the right places or not? This is not including my work savings program of about 4,500/year nor social security which won't be around when I retire. I just turned 25 years old...

100/month in Roth IRA

100/month into Index Fund

100/month into mutual funds

87/month into money market account

130/month into regular savings account

Would you consider all of these savings or just portions of it? Thanks.

Answer 1

You are doing fine with saving 20% of your after tax $$ (excluding your works saving plan).

If all of these amounts are growing without you touching them then yes they are savings.  You may want to shift a bit of the 130 from your regular saving into the money market and mutual funds.

Answer 2

Generally, the "x percent" refers to your gross or before tax income.  

In my opinion, I would fund enough of a savings plan at work to get the full matching from my employer.  Then fully fund a Roth IRA.  Then continue in my works, retirement plan.  Then start funding non-retirement plans.

Everything that you are investing I would consider savings as long as you do not plan on spending it.

In my opinion, I think that you are investing too much money in cash (your money market account and regular savings account).  Unless you are currently skittish about the market, or have a specific purpose for the money, I still would take more of a risk with the money.

Answer 3

Assuming you do not plan to spend this money, then it is all savings. You are saving a good amount, but you need to look at allocation. There are many types of "savings". You have short-term, long-term, retirement, emergency, vacation/big-item, etc. You need to decide which type of savings you need/want and how much to contribute to each. Compounding means the longer you save, the better the returns will be, so at your age retirement savings would be a good place to start. You are already putting in about $1200/year. Depending on what you are saving for you might want to bump this up a bit. Every extra amount you can put towards retirement now, will yield HUGE results when you retire 40+ years from now. I assume you are using your MM and regular savings as emergency fund/short-term savings. It is very important to have an emergency fund of around 6-months of expenses in case you lose your job or can't work for some reason. I do not know why you would have the MM and regular savings account separate. Why not just keep the higher yielding account and contribute the whole $200 to it? Both of these are safe FDIC investment types (although you need to make sure that the account is FDIC insured, because some MM accounts are not). As for the index and mutual fund accounts, if they are for long-term savings (college fund, house, etc), then these are fine. If they are for a short-term/vacation savings, then you need to have this money somewhere else. You shouldn't invest in the market if your horizon is less than 5 years and preferrably longer than 10 years. If these are meant for really long-term savings, like retirement, then I would put $300/month in the IRA and invest in the index and mutual funds you want through the IRA. Might as well get the tax savings if you are going to use this money for retirement.

All in all, if looks like you have your head on straight and are doing the right thing by "paying yourself first" (saving). Think about what goals you have for the money you are savings, and then decide how you want to allocate that money to meet each goal. Then, match your investment vehicle with the right savings type.

Good luck, you are doing great.