One of the biggest stumbling blocks when people are evaluating their financial plan is, “Am I saving enough?” The more formal and much longer answer is: What does your plan say you should be saving to achieve the goals you shared with your financial planner? But the quicker answer is 20%.

Not all 20% should be going into the same place, though. Usually, it’s broken down into three buckets: short term, midterm, and long term, and the allocation should be 5%, 5%, and 10%. A lot of clients fall into the trap of saving a dollar amount instead of a percentage of income, which tends to be detrimental when clients get annual raises, whether inflationary or based on merit. The percentage method automatically forces a client to save more money as their income goes up, whereas the flat dollar amount does not adjust.

Common short-term accounts include checking, savings, CDs, and money market accounts. It’s always advised to have 3-6 months’ worth of your expenses in this bucket as an emergency fund. The midterm bucket is typically made up of things like brokerage accounts holding underlying securities like mutual funds, individual securities, or bonds. It may also include college accounts like 529s if that’s a goal of the client. Long-term accounts are typically made up of things like 401(k)s and IRAs.

Like any part of your financial plan, these things should be addressed, at a minimum, annually and with a professional. Often factors change, like how much a client can contribute to these types of accounts and whether or not they’re still eligible to contribute, based on income caps or other factors.

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