How much money should you save each month? There are many ways to answer this question. The short answer is that you should save at least 20 percent of your income. At least 10 to 15 percent of that should go into your retirement accounts. The other 5 to 10 percent should go towards a mix of building an emergency fund, creating other long-term savings, and paying down debt. While this is a good rule to follow, it is not the only answer. If you want a more detailed answer, keep reading.
Your Financial Goals
To dive into understanding how much you should save each month, start by looking at your goals. Roughly speaking, your financial goals can be divided into three categories:
Short-Term Financial Goals
Short-term expenses that will occur within one year include things like taking a beach vacation, buying Christmas gifts, ensuring you have enough money to pay taxes, and saving for holiday celebrations.
Another example of a short-term financial goal is saving the equivalent of six months of expenses in an emergency fund. You can accomplish this in less than a year. If you want to save $5,000 in nine months, you will need to put aside $555 a month toward this goal.
Long-Term Financial Goals
In the category of less than a decade, expenses can include things like replacing household appliances, conducting major home repairs, buying a new car (preferably with cash), or making a down payment on a home.
Very Long-Term Financial Goals
Under the umbrella of more than a decade, your goals may include building a large college savings fund for your children or purchasing a second home. Of course, you should also include the ultimate long-term savings goal: retirement.
Creating a List and Planning and Calculating
We’ve already touched on the subject of retirement, so you can set that aside for now. In the list of expenses you are currently saving for, include everything else, such as weddings, home repairs, vacations, travel, and saving for college. Now write down your ideal savings goal and the deadline. Do this for each goal on your list. Then divide this timeframe by the amount of money you need for each goal.
For example, let’s assume you want to save $10,000 for a wedding and plan to get married in the next two years. You will need to set aside $416 per month over the next 24 months to reach your $10,000 savings goal.
Calculate this for each goal on your list. By the end of this exercise, you will likely realize that you cannot save enough. In fact, the first time I did this exercise, my savings goals were greater than my income.
What to Do When Your Savings Goals Exceed Your Income?
What can you do when this happens? First, adjust or cut some of the goals. Can you buy a less expensive car? Can you have a less costly wedding? Can you purchase a cheaper home that requires a smaller down payment?
Then, look for ways to reduce your current expenses. Canceling cable TV can free up an additional $50 or $60 a month, which you can put toward any of your savings goals. Then see if you can extend the timeline for any of your goals.
Do you need to replace kitchen appliances this year, or can you continue using the current ones for a few more years? Finally, look for ways you can earn more money, such as freelance work. In short, there are two ways to answer the question “How much should I save?”. If you want a customized specific answer to this question, you will need to spend at least 30 minutes writing down your goals and anticipating large purchases. If you want a quick and simple answer, make sure you are saving at least 20 percent of your income.
Questions
Frequently Asked Questions (FAQs)
Why is saving money important?
Even if you don’t have a specific goal in mind, setting aside savings provides financial stability. Having savings reduces the likelihood of unexpected expenses leading to debt.
What is the least liquid savings option?
Retirement accounts are among the least liquid savings vehicles. You can technically withdraw money from a retirement account, but it will incur costly penalty fees. Certificates of Deposit (CDs) are also illiquid as they are time deposits. Like retirement accounts, you can withdraw money early from a CD, but you are likely to face penalties for doing so.
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Sources:
Experian. “How to Budget Using the 50/30/20 Rule.”
Source: https://www.thebalancemoney.com/how-much-money-should-you-save-each-month-453930
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