When it comes to how much you should save each month, most of the articles you’ll read on this topic advocate the 20% rule. More specifically, they promote a 50-30-20 rule of thumb that will “guarantee” you save the “right” amount of money each month to be prepared for any life situation that comes along.
As we all know, though, reality often gets in the way. For example, a savings goal of 20% of your income is not realistic if your income barely covers your expenses. Thankfully, there’s a solution to that problem. This article will go over a roadmap to help you calculate and reach your own personal monthly savings goal.
So, do you want to save money each month and grow your personal finance? Then, you’re in the right place to learn how much to save and how to start saving now!
Start With Your Expenses
Start by doing the following:
1. Jot down your monthly income
2. List out all your living expenses
3. Categorize your expenses as essential or nonessential
You can further break down expenses by adding a category for “flexible” expenses. Takeout food and cable/mobile expenses fall under this category. We’ll go over those below.
At this point, you should have a good understanding of how much money is coming in each month (income) and how much money is going out (expenses). Your monthly savings rate will equal your income minus your expenses.
Developing a Strategy for Cutting Expenses
As any financial advisor will tell you, the first step in setting up savings goals should be cutting down expenses. Evaluate each of your spending choices, beginning with household expenses and bills. If your essential expenses don’t leave you enough leftover for savings, you may need a lower rent or down payment or a second job with better take-home pay.
Evaluate a month’s worth of expenses. Start with your cable bill. With online streaming services taking over all the good programming, cable has become an unnecessary expense. Eliminate it, get a stronger but not more expensive internet connection, and switch to streaming.
Do you still have a landline phone in your house? Get rid of it. No one uses those anymore. Switch to a more affordable mobile service. Don’t believe all the hype about only the big carriers providing good service. They’re all using the same infrastructure.
Furthermore, and this should be a no-brainer, stop eating takeout all the time. If you truly want to save more money, start cooking at home and bringing bag lunches to work. There’s no shame in that.
Think of it as putting off those take-out meals until retirement. You’ll want lots of them then. Finally, if you have credit card debt, consider paying it off first.
Open a New Online Savings Account
Savings goals cannot be realized if you don’t have a savings account. We’re not talking about retirement savings accounts. We’ll cover those below. At this stage, once you’ve added up expenses and made the necessary changes in that area, find someplace to stash your cash.
In recent years, new technology has been developed that makes this easier to do. Don’t focus on just a traditional bank account. There are apps and other alternatives to savings accounts that will do the savings for you, including a number of them that do “round-ups” and “spare change” deposits. Those add up.
Preferably, you’ll want to focus on long-term savings. Constantly depositing only to withdraw in a few days won’t get you anywhere. A good way to do that is to open an online high yield savings account that does not offer a debit card. Make it hard to withdraw money, and your savings will stay there.
If your savings goal is 20% of your gross income and your annual income entering your checking account is $50K a year, your monthly savings deposits need to add up to roughly $850. Of course, the money doesn’t all have to be in the savings account. Retirement accounts are savings also. We’ll cover those next.
Using Your Retirement Account To Save Pre-Tax Dollars
If you are a W2 employee with a company-sponsored 401(k) plan, you have an opportunity to save pre-tax dollars. This is the reason we calculate savings percentages using gross income, not net. For example, contributing $500 a month on a $50K salary is saving 12% of your gross income.
That leaves 8% or roughly $350 per month that you’ll need to come up with after taxes to reach your savings goal. Think of it as $90 a week. How much did you save by eliminating takeout? What were you paying for cable every month?
One of the best features of retirement savings accounts is that they grow faster. Unlike bank savings accounts that pay pennies in interest, a retirement account is a stock portfolio, with market gains that average 5% to 8% compounded annually.
If you have thirty years left until you retire, you need to save $481 a month to reach $1 million in your retirement savings account. From there, if you follow the 4% rule, which is standard for withdrawals, you can pay yourself $40,000 a year without touching the principal.
Read that last paragraph again, then do the math. If you need to save $481 a month for thirty years to reach $1 million, what happens if you follow the guidelines that we’ve laid out here and save $850 per month? That’s a substantial nest egg for your golden years and financial future, especially if you want to retire early.
Alternatively, you can open investment accounts. An investment account holds cash and the investments (stocks, bonds, ETFs, Mutual Funds, etc.) that you buy and sell to realize your money goals and financial independence. Contact a certified financial planner to help you with this.
Don’t Forget About Your Emergency Fund
Before you forsake the savings account and dump everything into retirement savings, keep in mind that life will throw you curve balls from time to time. Homeowners have repair expenses. Parents always need extra money for something or another.
Someone who puts aside $850 to save each month should allocate a percentage of that to an emergency savings fund. This should be part of your overall savings plan, not a separate strategy to set aside additional money. Retirement savings are long-term. Bank accounts are liquid assets.
If you’re following the 50-30-20 rule, it should be possible to cover unexpected miscellaneous expenses with that 30% portion set aside for those. Larger expenses, like medical bills or major car repairs, are what you’ll need an emergency fund for.
Final Thoughts: Saving Each Month
How much money should you save each month? For example, if you make $50K, you’ll want to set aside $500 a month for retirement and $350 a month for traditional savings. If you make less than that, split your savings equally between retirement and emergency fund.
For those making $30,000 a year or less, try contributing $150 a month to retirement and $25 to $35 a week into a savings account to use for emergencies and major expenses. It’s a tough adjustment initially, but it gets easier with time, and it’s definitely worth it.
