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How Much Money Should I Save?

by Nick Gallo

You know you’re supposed to be saving money. Maybe you’re starting to feel guilty about all of those company happy hours. But where do you draw the line? If you go too far and start clipping coupons out of the newspaper, your coworkers might give you a Scrooge-like nickname and snicker about it behind your back.

You need to find a balanced amount to save each month. Personal circumstances will influence your number a bit, but the principles are universal. These are some great guidelines figure out how much money you should save, whether you’re a fresh college graduate or a more experienced professional.

Begin By Tracking Your Expenses

No matter what your saving goals are, you should always begin by assessing your current monthly spending. Before you can get to where you want to go, you have to know where you stand.

Fortunately, a budgeting software like Mint makes this a painless process. It’s free, secure, and allows you to track all of your transactions with ease.

split transactions form
Source: Mint.com

Just connect your bank accounts and get in the habit of spending with your debit card (or credit card, if you can be disciplined) instead of cash. Do this for a month or two and you should have a pretty accurate idea of where your money is going.

Once you’ve done that, it’s time to create a budget and outline your saving goals. 

Save a Set Percentage of Your Income

Let’s face it. Budgets aren’t the sexiest thing in the world (to most people). Assigning an arbitrary dollar limit to have fun with each month is hard, and sticking to that limit can be even harder.

The best way to create an effective plan to figure how much money you should save is to focus on saving a set percentage of your income. It allows you to do three important things:

  • Implement a plan quickly: When you’re building a budget, time is (literally) money. The longer it takes you to get your finances in order, the more difficult it will be to dig yourself out of debt or break any unhealthy spending habits. A percentage-based approach helps you avoid analysis paralysis.
  • Set it and forget it: One unpopular aspect of money management is the need to revisit your plans regularly, but a percentage based strategy is easy to maintain over time. It doesn’t require extensive review or recalibration every time your circumstances change.
  • Reduce lifestyle creep: As their income increases, people tend to let their spending grow as well. This is perfectly natural, but it can become dangerous if it happens disproportionately. Sticking to your percentage ensures that your spending doesn’t get out of hand when your income grows.

Below are some examples of percentage-based savings goals: 

savings percentages

You may notice a whopping 0% in the discretionary spending column under Crisis Mode. This is because 20% is the minimum savings rate you need to aim for to retire at the traditional age (assuming you start in your twenties).

Otherwise, you’ll be stuck playing catch up. And there are still two whole other savings buckets to worry about.

How Much Money Should I Save? Three Savings Buckets

In general, there are three savings buckets that you’ll need to contribute to. Depending on your age and financial situation, the bulk of your savings may go toward one or the other:

  1. Emergency funds
  2. Personal savings
  3. Retirement

Below are some examples of how you might distribute your savings among the three buckets at various stages of your life.

savings rates

Here’s why those percentages make sense.

1. The Emergency Fund

If you’re starting from a net worth of zero (debt changes things), your priority should be to build an emergency fund.

This money is there to protect you when something unexpected happens (maybe a radiator breaks) and should be kept somewhere safe and accessible.

That doesn’t mean it belongs under your mattress. The best place to put your emergency fund is in a savings account because:

  • They’re safe and easy to draw upon when necessary
  • They accrue interest, which helps with inflation
  • You’re less likely to spend it when it’s separate from your checking account

How much you keep in an emergency fund should be a function of your monthly expenses. General wisdom advises somewhere between 3 to 12 months worth of essential living costs, depending on your risk tolerance and personal preference.

2. Personal Savings

Saving for emergencies is necessary to protect yourself, but hopefully, you’ll never have to spend that money. However, there are some big expenses that you can almost guarantee you’ll have to pay for at some point, such as:

  • Buying a home
  • Engagement, wedding, or honeymoon costs
  • College tuition for your children

When you’re deciding on a savings rate, make sure you assign a dollar value to these big-ticket items and include them in your calculations.

You should ramp up your emphasis on these only after you’ve built an emergency fund. Focus on them intensely as they approach, but try to avoid diminishing your retirement contributions for their sake.

This money should be kept in something relatively liquid as well. Don’t put it in anything volatile like stocks, which might make it unavailable when you need it.

3. Retirement

Last but not least, make your long-term future a priority consistently. Whether you’re aiming for an early or traditional retirement, the most important thing you can do is to start as soon as possible.

You may have to pull from your retirement funds for a few months to a year while you build your emergency fund, but as soon as that’s completed, make sure that you put at least 20% toward your retirement. 

This part of your savings can be invested in more volatile asset classes like stocks, index funds, or real estate to harness the power of compound interest. You should also use tax-advantaged accounts and your company’s 401(k) match to help you along. 

Ready to Get Started?

We hope this has helped you decide how much money you should save each month.

Are you looking to accelerate your retirement contributions? Maybe you’re saving for a new car? We’d love to hear your story.

Tell us all about your savings rate and financial goals in the comments below!

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