Figuring out how much to save every month is an important tool when planning for your future. But how much money you should be saving each month isn’t always simple to figure out. There are rules such as the 50/30/20 income split but is that a good fit for you?
One of the most important factors to long term financial security is your individual savings ratio. Determining the amount you should be saving every month is less clear. Should you save $100 per month? Half your monthly paycheck? If you have debt should you save or pay off the debt?
How Much To Save Each Month
It is popular to save 20% of your monthly income.
The 50/30/20 rule is broken down as follows:
- 50% of your income should go to things like rent, utilities, food, etc.
- 30% of your income should go to discretionary spending
- 20% of your income should go into savings
This is a good rule to know how much to save each month is to follow if you’re able to. Not everyone will be comfortably able to save 20% of their monthly income so determining what is a safe percentage of your income to save each month is important.
If you have a high-income level it is smart to keep your costs low and save more of your monthly income. But if 20% seems like an impossible figure to save remember that saving anything each month is better than saving nothing.
20% is a good starting point. If you can save more, do so.
Why Should You Save Your Money?
Being prepared financially for whatever life may throw at you is one reason why you should decide how much to save. Another reason is to maintain your current lifestyle as you get older. Having no “nest egg” for your golden years can mean hardship and anxiety.
I have a grandmother who finally retired at the age of 89. She worked because she loved to, but she really worked at that age because she had to. Her and my grandfather did not do long term financial planning and therefore when he died, she was ill-prepared to pay the bills. So, she drove to Macy’s 5 days a week at 5 am to do floor re-pricing for 4 hours a shift. She always told me growing up to plan for the future, and she meant savings and retirement.
How Much Should To Save to Achieve That?
It really depends on your circumstance. Are you willing to live below the poverty line, or do you need first-class trip flights to Europe every year for vacation? Or are you like most folks and are ok falling somewhere in between these two? Your investment performance will also impact your savings. Determining what sort of standard of living you want to keep now while your saving and also after you retire is important to determine how much you need in retirement to live a certain way.
There is a rule known as the “4% Rule” which says you could theoretically take out 4% of your balance every year and live on it for the remainder of your life. If you can save 25X your annual expenses you can become financially secure.
But this rule has some drawbacks. Firstly, “risk-free” investments do not exist. Inflation or a stock market crash is always a threat to investments and savings. Depending on how much you save annually this can be a vastly different length of time. The more you save and the lower your expenses are the faster you’ll save enough to be financially independent.
Accounts with Tax Advantages Make a Difference
Tax friendly retirement accounts like IRAs and 401(k)s improve your savings level and can more quickly aid in becoming financially secure down the road. Taking advantage of these sorts of savings and investment accounts can make a huge difference when you hit retirement age.
Also, consider a Roth IRA if you qualify. When you’re older and retire Roth IRAs are tax-free when you withdrawal money in retirement. This is a huge advantage as the money you’ll be withdrawing is tax-free at that point. Meaning if you take out $10,000, you get $10,000. Tax-free advantages like this are a huge plus for retirement.
Contributing to your 401(k) will also help you get to that 20% saving level especially if you have an employer match of 5%. You’ll only have to save 15% of your income to reach 20% as your employer is covering that last 5%. The funds are also deducted directly from your paycheck before taxes are taken out meaning you are saving money on your cash taxes as well.
Not everyone has a typical employer-backed 401(k). If you’re self-employed, it will be on you to set up your own retirement plan. That is where IRA’s come into play (traditional IRA, Roth IRA, SEP-IRA, etc.)
What if Saving that Much is too Much?
Not everyone will be able to comfortably save 20% of their income every month. There is nothing wrong with that! Day to day life has expenses so be sure you’re covering what you need to first and remember that saving something is always better than saving nothing.
Start where you can. Will 1% be a safe saving level? What about 5%? Or 10%? Determine what your monthly average costs are and if there is any money you can save (no matter the percentage of your income) then do it. You want to get to 20% where possible but sometimes we must start small.
Cut expenses where you can as well. Smart personal finance means living within your means. If you think you can’t put any money away every month but buy Starbucks every day for $5.00, then you’re looking at this the wrong way. If you cut out the coffee shop at $5 a day, you’d have up to $150.00 saved each month (30 days @ $5.00/day). Start making coffee at home. This change on its own will be a great saving starting point.
What About my Debt? Should I Still be Saving?
By paying of your debt as quickly as you can you’ll also start saving more money. When you’re debt-free interest can not be accrued over time. This means that you will save even more as well.
Take a look at our article on Getting Out of Debt On Your Own for some smart guidance.
How can I get to 20% Saved Income?
There are lots of ways to plan out getting to 20% of your income saved. If you have a job where your employer will match 5% of your 401(k) investment, then you can simply save 15% of your income and they’ll add 5% which gets you to 20%. But there are other ways as not everyone has a traditional 401(k) to work with.
First, you need to know what your monthly income is and what your costs are every month. When you have that figure you can start to plan. Reduce costs wherever you can as well. (See our article on Retirement Saving 101 here)
Where Should you Save your Money?
Once you figure out how much to save, we recommend using one of the many online-only savings accounts. They pay a better interest rate in comparison to traditional banks and are easy to set up. Because online banks do not have any physical locations their operating costs are less and therefore the savings get passed onto you.
You can also be “saving” by putting money into a 401(k), IRA, or other investment accounts. Remember that these do carry some risk as they are based on the stock market. But, over the course of time if we look at the stock market figures it only goes up. Even considering things like the Great Depression where the market crashed and within a 20-year period was back to reaching new highs.
If a recession happens you can count on the fact that over time the market will recover. If you’re young you have more time to recoup any losses so your threshold for risk should be high. It’s smart to have investments leveled at 80% aggressive and 20% conservative when you’re young, if not even more aggressive.
Verdict: Start Saving Now!
Figuring out how much to save is always better than saving nothing. Planning for the future requires some thought and more important some action. How much money you should be saving every month is individual. Start where you comfortably can in terms of saving. Maybe that is only $20 a month for right now, but it is something that can build and grow over time. You just have to get started.