Saving money is an important part of financial stability. However, everyone is different and has unique long-term goals. Regardless of your situation, you may ask yourself, “how much money should I save each month?”
The amount of cash you regularly save plays a significant role in helping you reach your financial goals. This guide evaluates what you need to save and how to align your actions with your savings goals.
How Much Money Should You Save Each Month?
There are many theories behind how much you should save regularly, but the one that is most frequently recommended is the 50/30/20 rule.
The rule is a budgeting method that suggests the following:
- Spend 50 percent of your budget on necessities like housing and food
- Spend 30 percent of your budget on discretionary spending
- Allocate the remaining 20 percent to savings
Let’s take the example of earning $4,000 per month after taxes. Following the 50/30/20 model, you would allocate $2,000 towards needs, $1,200 towards discretionary items, and the remaining $800 towards savings.
We support the idea of saving at least 20 percent of your monthly income. However, you must personalize it to your situation. You may need to save more money to achieve your goals of financial security.
If you’re unable to save at least 20 of your income each month, don’t let that stop you. Saving something is better than nothing, and there are many ways to increase your savings over time.
Using a monthly budget is an excellent way to identify ways to reduce your expenses and increase your savings rate.
Where Should You Put Your Savings?
An online savings account is the best route to build your savings. Physical banks also have savings accounts, but their rates are often paltry compared to an online institution.
You want to find an online bank with minimal fees that doesn’t require an excessive amount to open an account. Most online banks allow you to automate transfers, which is a simple way to save money every month.
CIT Bank is our top choice to save money. Their money market account currently pays 0.45 percent and is FDIC-insured like a savings account. You only need $100 to open an account.
Chime Bank is another excellent choice to store your savings. It currently pays 0.50 percent on its savings account with no minimum balance requirement.
Additionally, it has other helpful features like early direct deposit and round-ups on purchases that get transferred to your savings.
Start with an Emergency Fund
An emergency fund is the first priority when you save money each month. It’s foundational and comes before putting money in any other account.
Life is full of the unexpected, and you never know what may occur. Your air conditioner could break down, or your car may need costly repairs.
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If you don’t have money set aside for emergencies, you could incur debt. This will sabotage your savings efforts.
To start, aim to have $1,000 in your emergency fund. Then you want to achieve one month of living expenses. Use that as a base to reach at least three months of living expenses, and finish at six months.
This amount can be included in the 20 percent you save each month. While it can be just as overwhelming, it’s key to start, regardless of the amount.
You can even use a savings challenge, like the 52-week challenge. The challenge has you save $1 the first week of the year, adding an extra dollar each week until you hit $52 the last week of the year.
The net result is $1,378 saved. That’s a terrific way to start an emergency fund.
Don’t Stop at a Savings Account
A healthy savings account is just one part of actively working towards financial independence. They’re a fantastic way to reach short-term goals but are inefficient at reaching longer-term goals.
Part of saving 20 percent of your income every month is investing in the stock market. That can entail saving for retirement in an account like a Roth IRA or investing through your employer-sponsored 401(k) plan.
The benefit of a Roth IRA is you can withdraw funds tax-free upon retirement. You can also withdraw funds tax-free if you’re using the funds for a first-time home purchase.
Like saving in a savings account, don’t let the amount you have dictate when you start. Time is the best gift you can give your money. Even if it doesn’t seem like it will amount to much, it will grow over time.
For example, the S&P 500 index has averaged a near-annual ten percent return for a century. Starting now is the best way to grow your money, regardless of the amount.
If you’re new to investing or don’t know where to start, Betterment is a great resource. They help manage your investments in alignment with your goals, charge minimal fees, and have no account balance requirements.
Here is a brief overview off what to expect with the service.
Betterment at a Glance
Read our review of the service to learn more.
How Long Does it Take to Amass $1 Million?
It’s essential to have a goal in mind when you ask yourself, “how much should I save?” Your goal should be specific to your situation. Look at your spending habits, cost of living, and more to determine your goal.
A common goal for many people is to reach at least $1 million in assets. Your goal may be different, and that’s fine.
However, regardless of your goal, it’s essential to start as early as possible. That’s even true if you’re living paycheck-to-paycheck and can’t immediately save 20 percent of your monthly income.
More time is the best assistance you can give your savings efforts. For example, if you want to reach $1 million by 67, here’s how much you need to save each month, assuming a modest six percent return.
|Age||Monthly Amount to Hit $1 Million|
Your goal is likely different, but the sentiment is the same. It’s better to start earlier, even if it’s in smaller amounts. Otherwise, you will need to put more money away in the future to reach your goal.
If you’re struggling to find money to save, reduce your spending and identify ways to lower your bills to free up cash.
Ways to Increase Savings
Do you want to know how to save more money every month? Here are some simple ways to amplify your savings efforts.
Start a Budget
One of the top ways to increase your savings is to start a budget. A budget may seem restrictive or difficult to follow. Fortunately, that is not the case.
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A budget helps you analyze your monthly expenses to determine if you’re receiving value for your spending. For instance, if you’re spending $200 per month on cable, you may be able to cut that expense.
Our course on cutting the cord is a terrific way to learn how to cancel cable and save at least $1,200 annually.
Go through your budget and determine ways to lower your monthly bills. The amount you claw back can aid your savings efforts.
While it is essential to reduce your expenses, you can’t cut your way to wealth. However, if you combine the cuts with making extra money, that instantly maximizes your efforts.
Ask for overtime at work or volunteer to take on new tasks. If that’s not possible, a side hustle can be a great way to increase your earnings. It’s best to pair a side gig with your skills and schedule.
If you value flexibility, a delivery app job like DoorDash is a suitable place to start. You can work on your own schedule and earn up to $25 per hour when you include tips.
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When you divert your earnings entirely to savings, you’ll be surprised at how quickly you can reach saving 20 percent of your monthly income.
Take Advantage of Free Money
If your employer offers a 401(k) plan to help save for retirement, you may be overlooking an easy way to increase your saving with their match.
The match is money they give you to save for retirement. For example, if you contribute eight percent of your paycheck and they match 50 percent, you receive an additional four percent in your account.
That’s free money and is included in the 20 percent number you should save each month. Each 401(k) plan works differently, so matches vary.
Better yet, your contribution comes out before taxes, so it lowers the amount of taxes you pay.
Debt is the largest detractor to your savings efforts. Instead of putting your money to work for you, you’re sending monthly payments to someone else to make them wealthy.
A budget is a good way to avoid debt as it helps you stay abreast of your spending. If spending is a problem, ask a friend to keep you accountable for your spending.
How Much Does the Average American Save Each Month?
According to this report from Federal Reserve, the typical American family usually saves around eight percent of their monthly income. That rate varies over time but usually holds steady between seven and eight percent.
Don’t use that as an indicator of what you should save. In many cases, that amount will not be enough to help you achieve your specific goals.
If you’re only able to start with the average, that’s terrific. Use that as a foundation to increase your efforts in the future.
Personalize Your Savings
The idea of saving 20 percent of your monthly income can be overwhelming. Don’t let that hinder you from getting started. Even if you can only save five percent of your income each month, that’s better than not starting.
Similarly, each situation is different. We all have different goals, and it’s essential to match your savings efforts with that goal. You might be able to save more than 20 percent, or your goals may not dictate that.
To succeed, you must pair your savings efforts with what you want in life. If you do that and start as early as possible, you will increase the viability of reaching your goal.
Knowing how much you should save every month is a great question to consider. We all have different priorities, so it’s vital to align what you save with your goals and particular situation.
Starting is the most important part thing you can do. Time will aid your efforts, so start saving as soon as possible.
How much money do you save every month? What’s one overlooked thing you think many people miss when trying to increase savings?
*Chime is a financial technology company, not a bank. Banking services provided by, and debit card issued by, The Bancorp Bank or Stride Bank, N.A.; Members FDIC.