Saving money consistently each month is crucial for building wealth and achieving financial goals. Determining how much to save can be challenging, as everyone’s financial situation is unique. As a general rule, most experts recommend saving 10-20% of your net monthly income. However, the ideal savings rate depends on factors like income, expenses, debt, retirement goals, and more. This article will provide guidelines for how much you should aim to save each month and strategies to help maximize savings.
What Percentage of Income Should You Save?
One common benchmark is to save 10-15% of your net income each month. Net income refers to your take-home pay after taxes and deductions. Saving 10-15% is a reasonable goal that allows for current spending while also building savings.
Here are some general recommendations for savings rates based on income:
If your income is:
| Less than $50k | Aim to save 10% |
| $50k – $100k | Aim to save 15% |
| Over $100k | Aim to save 20% or more |
The more you earn, the higher percentage you can feasibly allot to savings. Of course, this depends on your expenses and financial obligations too.
Some experts recommend saving up to 20-30% or more of your income, especially if you start saving in your 20s and 30s. The benefit of high savings rates early on is the power of compound interest. The earlier you start saving and the more you can save, the faster your money grows.
Factors That Influence How Much to Save
While 10-15% is a decent starting point, consider these factors to determine your ideal savings rate each month:
Existing Savings
If you already have adequate emergency savings of 3-6 months of expenses and are on track for retirement, you may be able to save less than 10%. If you have little savings, you may need to save aggressively to catch up.
Debt Payments
If you have high-interest debt like credit cards, focus on paying that down aggressively before prioritizing savings. For lower interest debt like a mortgage, you can save simultaneously.
Income Stability
If you have an unstable income source, maximize savings when income is flowing. Save a larger percentage during good months to have a buffer during leaner times.
Upcoming Expenses
Bulk up savings if you know you have a major expense coming up like a home purchase, relocation, or launching a business.
Retirement Plans
Review your retirement savings target and increase monthly savings if you are behind where you want to be. Staying on track for retirement should be part of your overall savings strategy.
Children and Dependents
Having kids and other dependents means planning for increased expenses like childcare, healthcare, and education costs. Boost savings to account for their needs.
Lifestyle Inflation
As your income rises, resist ramping up spending. Continue living below your means and increase savings rates as income grows.
How to Increase Your Savings Rate
Sticking to a monthly savings goal takes discipline, especially on a tight budget. Here are some tips to save more:
Pay Yourself First
Automate savings by setting up direct deposit from your paycheck into a separate savings account. Out of sight, out of mind.
Trim Expenses
Look for areas to cut back like dining out, subscriptions, shopping and entertainment. Small cuts make a difference.
Schedule Savings Deposits
Develop a regular schedule, like transferring savings on paydays or the 1st of the month. Consistency is key.
Limit Lifestyle Inflation
As your income grows, avoid increasing your spending at the same rate. Funnel raises and bonuses straight to savings.
Track Spending
Use a budgeting app to get visibility into where your money goes. Identify waste and consciously reduce it.
Earn More Income
Consider a side hustle or asking for a raise to bring in more income that can be directed to savings.
How Emergency Fund Savings Fit In
Emergency savings deserve their own category, separate from long-term savings goals. Aim to build up 3-6 months of living expenses in an emergency fund so you don’t go into debt for unexpected costs.
Consider splitting savings contributions — for example, 10% to an emergency fund and 10% to retirement accounts. Once your emergency fund is robust after a few months, redirect that 10% to other big goals.
How To Prioritize Multiple Savings Goals
When juggling multiple financial goals, how do you determine saving priorities? Here are some guidelines:
Emergency Fund
Top priority if you don’t have adequate emergency savings, as this protects you from high-interest debt in a crisis.
Retirement
CRITICAL to stay on track for retirement, especially if you have a late start. Take advantage of employer match opportunities.
Debt
Focus on accelerating payments on high-interest debts like credit cards first before saving.
Home Purchase
Down payment savings are important when buying a home, factor this in before other big purchases.
Education
If kids’ education is a goal, consider opening a 529 college savings plan.
Big Purchases
Luxury goals like vacations, vehicles, etc. come after necessities are funded.
Have a clear purpose and timeline for each savings bucket to inform how much to allot monthly. Within reason, it’s okay to pursue multiple goals simultaneously by splitting savings.
Savings Guidelines By Age
Savings needs evolve throughout different life stages. Here’s an overview of what to prioritize saving for at different ages:
In Your 20s
– Start retirement contributions to benefit from decades of growth.
– Build emergency savings fund.
– Pay off student loans and other debts.
– Save for big purchases like a home, wedding, or vehicle.
In Your 30s
– Ramp up retirement savings to at least 15% of income.
– Top up emergency fund as needed.
– Save for kids’ education if relevant.
– Bank for down payment if buying a home.
In Your 40s
– Max out retirement accounts and catch up on savings.
– Ensure adequate life insurance coverage.
– Build college fund for kids.
– Pad emergency fund for added stability.
In Your 50s
– Invest aggressively for retirement if behind.
– Eliminate debts.
– Determine retirement income needs and shortfall.
– Review estate planning.
In Your 60s
– Supplement retirement income if needed.
– Review healthcare provisions.
– Discuss estate planning with family.
– Set aside savings for elderly parent care if needed.
Retirement Savings Benchmarks
One of the biggest savings goals for most people is ensuring you have enough income in retirement. While there are no perfect benchmarks, here are some guidelines for retirement savings at different ages:
| By Age 30 | 1x your annual income |
| By Age 40 | 3x your annual income |
| By Age 50 | 6x your annual income |
| By Age 60 | 8x your annual income |
| By Age 67 | 10x your annual income |
So for example, if you earn $50,000 a year, you would aim to have $300,000 saved for retirement by age 40. This gives you an indication if you are falling behind where you should be.
These benchmarks assume you start saving in your 20s and save consistently throughout your career. Late starters will need to save more aggressively to catch up. Review your specific retirement income needs and adjust your savings plan accordingly.
Max out tax-advantaged accounts like 401(k)s and IRAs first before investing in taxable accounts. Take advantage of employer matching, compound growth, and tax benefits to supercharge retirement savings.
Using Multiple Savings Vehicles
Don’t keep all your savings in one account. Spread funds across different vehicles to maximize returns and benefits. Some options to consider:
High Yield Savings
For emergency and short-term savings funds. Offers easy access with minimal risk.
CD Ladders
Lock in higher fixed rates over staggered maturity dates for conservative medium-term savings goals.
Money Market Accounts
Earn higher interest than savings accounts with easy access to funds.
IRA or Roth IRA
Tax-advantaged retirement savings accounts. Roth IRAs offer tax-free growth.
401(k)s
Workplace retirement plan with tax perks. Aim to contribute enough to get full employer match.
Brokerage Accounts
Invest for long-term goals like retirement in index funds, bonds, etc. Avoid frequent trading.
Real Estate
Rental property income and appreciation can boost savings long-term.
Diversify your savings across accounts best suited for your different goals and time horizons.
Automate transfers to different accounts on payday for seamless hands-off savings habit building. Review asset allocation at least annually and rebalance as needed.
Take a Holistic Approach
Isolating savings rate alone doesn’t guarantee financial success. Also focus on:
– Increasing your income through raises, bonuses, promotions, side hustles, etc. The more you earn, the more you can save.
– Following a budget that aligns spending with your values and priorities. Don’t overspend on wants at the cost of needs.
– Managing and reducing debt load, which eats into the ability to save.
– Investing savings wisely with enough growth potential and safety to meet financial goals.
– Having appropriate insurance policies to mitigate risk.
– Planning for changes in income and expenses from life events like having kids, switching careers, relocation, etc.
Your savings rate is one part of your overall financial plan and habits needed to build long-term wealth.
Conclusion
Savings discipline and consistent investing of your money is required to achieve financial freedom. Make saving a habit by automating transfers from your paycheck to hit a monthly savings target. While 10-15% of net income is a good benchmark, consider your unique circumstances to determine an optimal savings rate and prioritization of short- and long-term goals. Maximize savings in tax-advantaged retirement accounts, emergency funds, college funds for kids, and other vehicles appropriate for different time horizons. Re-evaluate your progress and savings allocation at least annually. Building wealth takes diligence, but with time and smart money habits, you can grow significant savings that offer freedom and flexibility.