How Much Money Should You Save?
If you’re putting together a budget for the first time, one question you should have is, “How much money should I save?” It’s a common personal finance question, but unfortunately, it doesn’t have a straightforward answer. Your ideal savings rate depends on your income, expenses and personal goals, and will likely change throughout your life as your income grows or fluctuates.
It can be tough to decide on an initial savings rate, but we’re here to help. To guide you in figuring out how to save money and how much to save per month, we’ve put together this short guide.
The 50-30-20 Rule
When it comes to a savings rate, there is no hard and fast rule. However, there are some general guidelines like the 50-30-20 rule, which can help you figure out your ideal savings rate. According to this rule of thumb, 50% of your after-tax income should go toward necessities like rent, student loans, and car payment. 30% should be spent on wants like travel and entertainment, and 20% should go into savings.
“Ten to fifteen percent is the first summit, but then ideally we’d like to get clients to twenty percent,” Eric Mangold, certified wealth strategist CWS (r), said. “It doesn’t happen overnight, so coaching clients on how to save without it making a dent in their lifestyle is very important, too.”
This rule may not work for you as it’s written, but you can adjust the percentages to better suit your financial circumstances. If rent and bills take up more than half of your paycheck, for example, you can cut down your allocations to wants and savings. Even if you do have enough disposable income to spend 30% on entertainment, you may decide that you want to put some of that money toward your savings fund instead. This rule is completely customizable, so play around with the percentages to create a budget that fits your current income and financial goals.
Building an Emergency Fund
Once you’ve decided on a savings rate, you should figure out where to deposit that money each month. Ideally, you should have three different savings accounts: one for your emergency fund, one for general savings and one for retirement.
If you don’t have an emergency fund yet, you should focus on building that up first. Your emergency fund should have enough money in it to cover at least three to six months of basic living expenses. That may sound like a lot, but if you lose your job, you’ll be glad you have such a large stockpile of cash. Instead of worrying about paying your rent and bills, you’ll be able to focus all of your energy on your job search.
Emergency funds are also useful for covering unexpected expenses without going into debt. The next time your car breaks down or your dog gets sick, you can use the money in your emergency fund to pay the bill instead of charging it to your credit card. This puts you in a much more financially secure position and eliminates a lot of stress. If something comes up, you know you’ll be able to handle it.
Once you’ve put away enough money to cover emergencies, you should start saving for short-term goals like buying a used car and long-term goals like retirement. Try to put between 10% and 15% of your income into your retirement account. The rest of your savings can go into a general savings account that you’ll use to fund major expected purchases over the next few years, such as a home or car purchase.
How to Start Saving
Now that you have a savings plan in place, all you have to do is stick to it — easier said than done, right? There are a number of money management strategies you can use to ensure you stay on track and hit your savings goals every month.
“If someone isn’t saving at all, getting them to save ten percent is a non-starter. But getting them to save four percent isn’t tough, and then next year we boost it to six percent and then eight percent the year after. Pretty soon, they are saving an amount that will set them up for retirement without it impacting their lifestyle,” Mangold said.
If you struggle with impulse buying, one thing you can do to prevent yourself from overspending is to set up automatic withdrawals from your checking account. You can have your bank move a portion of your paycheck from your checking account to your savings account a day or two after you get paid. You’re less likely to spend money that’s tucked away in your savings account, so this strategy can help you achieve your financial goals on a more consistent basis.
Budgeting apps like PocketGuard can also prevent you from exceeding your budget. It shows you exactly how much spending money you have leftover each month after bills and savings contributions. The app is linked to your bank account and credit cards, so every time you buy something, it updates automatically. You’ll always know what you can safely spend on eating out and entertainment without having to crunch the numbers, which makes budgeting easier.
Another thing you can do to maximize your savings is to open up a high-yield savings account. The average interest rate for conventional savings accounts is just 0.09%. If you want to earn more interest on your money without investing it in the stock market and risking losses, you can put it in a high-yield savings account. Ally, a popular online bank, offers a premium savings account with low fees and a competitive APR of 1.60%. Ally estimates that you’ll earn $400 in interest every year just by putting your money in one of its savings accounts.
Other ways to save money include picking up a side hustle, putting windfalls like gifts and raises directly into savings and cutting down on unnecessary expenses such as eating out. If you stick to your budget and find ways to grow your income and reduce your expenses, you’ll be exceeding your savings goals in no time.
“Whether people use the fifty-thirty-twenty rule or another way of savings, it doesn’t matter. This is a situation where the results are the most important thing,” Mangold said.
The Final Word
When it comes to saving, there’s no one size fits all solution. How much money you should save each month depends on your income, financial goals, debt load and lifestyle. If you can only set aside a few bucks a month right now, that’s okay. As you get better at budgeting, find new ways to grow your income and pay down your debt, you’ll likely be able to increase your savings rate. Even if you can’t, saving something is better than nothing. Every dollar you put in your savings account improves your situation and gets you closer to financial security.