The key to financial stability is building up your savings. Yet, not everybody knows the most important rules of this invaluable practice.
So how much should you save a month? In this guide, we’ll answer your questions on savings and monthly budgets. You’ll learn how to budget correctly, what percentage of your paycheck should be set aside, and much more.
How Much Should I Save Each Month?
The answer to this question is not the same for everybody.
Many experts recommend the 50-30-20 budgeting plan. It entails saving 20% of your income and allocating 50% to necessities and 30% to discretionary spending.
While the 50-30-20 (or 50-20-30) rule is suitable for the average worker, it depends on how much your pay differs from the average monthly gross salary.
If you earn a high income, you should minimize your expenses to maximize your savings. You can then invest in business ventures and put money into a personal savings account or investment funds.
If you make less than the average, or you’re struggling with expenses in general, you may be unable to save 20% of your monthly income. Nevertheless, something is better than nothing, so try to put aside some money for future needs.
1. How Much of My Paycheck Should I Save?
Your objective should be to save at least 20% of your paycheck each month. Still, don’t feel stressed if you can’t do that. Just do your best to save as much as possible.
On the other hand, if you’re saving for something expensive, maybe for a new car, consider increasing the percentage of income to save to about 30%. Saving more than that could be possible but would require serious efforts and cutbacks or a high enough salary.
Some experts suggest saving only 10% of your paycheck. That’s a perfectly fine objective, especially if your salary limits how much you can save. Still, don’t stop there and keep trying to save more when possible.
2. What Is a Good Savings Rate?
Around 20–25% of your monthly income is a good savings rate. Anything above that, especially around 50%, is an excellent savings rate. Of course, the higher it is, the better.
Additionally, the more you can save from each paycheck, the closer you are to a stable retirement.
The best way to increase your savings rate is to earn more and spend less. Your income will generally grow as you get older. If you can also keep being frugal, you’ll be in good shape.
We suggest using this online savings calculator to estimate the ideal savings rate for you.
3. What Is the 50–20–30 Budget Rule?
The 50-20-30 rule is a reliable and, to some extent, flexible budgeting plan that divides your monthly income into three unequal parts: necessities, secondary expenses, and savings.
Half of your paycheck goes toward your “needs,” e.g., the things you can’t live without. Bills, food, and housing expenses all fall in this category.
A fifth of your salary goes straight into your savings account or toward repaying debts. You could increase your savings rate to 30% without too many compromises, apart from a slight reduction in disposable income.
Finally, you can spend the remaining 30% on “wants,” e.g., things you don’t necessarily need but improve your life. You should try to keep these expenses as low as possible and increase your savings instead.
4. How Much Should I Save a Year?
Let’s assume you start saving at the age of 25, and you don’t stop until you reach 67. In that case, you should put aside at least 15% of your total annual income every year. This rate will allow you to save enough money to retire at age 67.
Bear in mind that 15% is the bare minimum. As you get older, you should aim to increase that percentage.
To motivate you to save even more, consider the 1% challenge. To ensure a secure retirement, aim at increasing your savings rate by 1% every year until you retire.
While it may not sound like a lot, due to compound interest, a 1% savings increase each year can potentially result in 3% more money for you after retirement. Keep doing this for 30 or 40 years, and you’ll see why it’s such a big deal.
5. How Much to Save for Retirement?
You could follow many guidelines to estimate how much money to save for retirement. It’s best if you tailor that sum to your own needs.
One rule of thumb is to save 10–12 times your pre-retirement salary. If you save 20–30% of your annual income, you can retire by the age of 65.
Depending on what annual income you want to have after you retire, you can tailor your objective accordingly.
Use this excellent retirement calculator to see where you stand in your savings journey.
6. How Much Should I Have in Savings?
Did you know that you could be actually saving too much?
We’re not talking about saving for retirement, which is an investment toward your wellbeing later in life, but about leaving too much money saved up without a purpose.
Such “stagnant” money doesn’t benefit you, and it’s one of the most common financial mistakes. The ideal amount to keep in the bank for a rainy day is three to six times your monthly income.
Prioritize saving monthly for short-term needs until you put enough money aside. But once you have enough resources, you should start allocating more to your retirement savings.
When you reach the desired threshold, you can focus on something else. Dedicate more funds to your retirement account or invest in the real estate market, for example.
7. How Much Money Should I Have Saved by 21?
(The Motley Fool)
Starting to save early is one of the best financial decisions you can make.
It gives more time for your wealth to grow, and you won’t be stressing about your savings as you get older.
By the age of 21, assuming you’ve been working full-time, you should have saved up to 20% of your gross annual income. For an average salary, that means around $6,000.
8. How Much Money Should I Have Saved by 35?
(T. Rowe Price)
Once you reach 35, you should have an established career and a stable financial situation. Your annual income has most probably increased, and so have your possibilities to save.
By that time, you should have saved around 1.5 times your annual gross income. Depending on how early you started saving, it’s also possible to have two times your yearly salary in your savings account by the age of 35.
Saving is essential for your financial stability and wellbeing.
It could be fun to spend all your money on beer, entertainment, and fancy cars, but then you might have to work until you’re 90.
Follow the 50-30-20 rule, or do your own thing, but whatever your plans may be, keep saving!