3 steps to financial security: Save, save, save

Not sure how much you should be saving? Follow these tips to get on the right path.

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By Walter Updegrave, Money Magazine senior editor

Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

NEW YORK (Money) -- Question: What percentage of income should someone save in order to be considered financially responsible? I'm wary of spending now because of the bad economy, but I don't know how much I should be saving on a monthly basis. --Lionel, San Diego, Calif.

Answer: I guess there's nothing like the combination of a market meltdown, housing crash and a recession to get people into to a saving frame of mind.

Whether it's someone who wants to know the true meaning of living within your means or a reader looking for timely and practical advice on how best to use his tax refund, I've been getting more and more questions suggesting that people are increasingly eager to save and, like you, become more financially responsible.

That said, there's still plenty of room for improvement on the savings front. For example, yesterday's quarterly GDP release from the Bureau of Economic Analysis also shows that the U.S. personal savings rate climbed to 4.2% in the first quarter of this year. That's a nice increase from the 3.2% at the end of last year and a major improvement from the negative 0.7% rate back in early 2005. But it's still below the double-digit savings rates of the mid-1980s.

And when it comes to socking away bucks for retirement, the National Foundation for Credit Counseling's 2009 financial literacy survey also shows we're not exactly knocking ourselves out. About a third of those polled said they put away nada for retirement, another third save 1% to 10% and just under a quarter save more than 10%. (The rest said they didn't know how much they set aside or refused to answer.)

So how much should you be saving each month to be leading a financially responsible life?

Well, as much as I'd like to be able to tell you to save 10%, 15% or whatever and you'll be fine, it's impossible for me to do that without knowing a whole lot more about you. The percentage of income that's appropriate for you will depend on your income, age, the amount of money you've already saved, your employment prospects and, most important, how much you're willing to forego immediate gratification for current and future financial security.

I can, however, give you a few tips on how to become a more responsible saver. And once you get started, you can then settle on a regular savings routine that suits your circumstances.

Start by building an emergency fund. The single most important reason to save is so you have at least some protection against life's little (or not so little) setbacks. I'm talking about everything from a job loss to a leaking roof or broken-down car to a kids' orthodontia bills. Basically, all the "non-recurring" expenses that still seem to occur often enough to wreak havoc with your budget.

Ideally, you should have three to six months' worth of living expenses in this fund. And to assure this dough will be there when you need it, you should keep this money in a savings account, short-term CDs or a high-quality money-market fund. For federally insured banks paying the most competitive yields, visit bankrate.com.

Develop a retirement savings regimen. Once you've established your emergency fund, your next priority is to begin saving regularly for retirement. Again, I can't give a magic number, but several tools can help you come up with a reasonable amount. For a quick estimate, go to our How Much You Need To Save Tool.

If you can't handle the figure the tool recommends, save what you can and increase the percentage slowly, maybe bumping it up a percentage point each year or increasing it with each pay raise until you get to the right level.

Once you've signed up for your 401(k) or are saving regularly in other accounts, you can periodically check out a more sophisticated calculator, such as our Retirement Planner, to review your savings strategy and possibly tweak it.

Look for additional ways to save. Even after you've got your emergency fund and retirement covered, you're probably going to want to save occasionally for other goals, say, a down payment for a house or car or college costs for kids. Coming up with extra savings when you're already regularly contributing to a 401(k) or other retirement accounts can be tough. But if you're serious, there are ways to do it.

One is to try a few techniques that effectively allow you to "fool" yourself into saving more. Another is to specifically target big-ticket items in your budget for downsizing, since that's where you'll likely find the largest potential for saving.

One final note: Don't let easy excuses prevent you from saving to your full potential. When people without savings were asked by pollsters working for the National Foundation for Credit Counseling why they didn't save, the number one reason offered (by 59% of respondents) was that they had a limited income.

Hey, guess what? We've all got limited incomes. But unless you're among that unfortunate group of people whose incomes are so low that they can barely squeak by, there's always some spending that can be pared back at least a bit to put away a few bucks for the future.

Got a question for the expert? We want to hear from you. Post your video or typed question to Walter Updegrave's iReport page and your question could be answered in the next Ask the Expert column or video. To top of page

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