How Much Money Should You Save Every Month?
Saving money is important. It allows you to meet your short and long-term financial goals as well as address any temporary financial challenges when things go bad. Once you have decided to start saving money in a disciplined way, the next question is how much. How much money should you save?
You can answer this question in three ways.
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First, you can just say to yourself that you will save as much as you can. This can either mean saving so much that you have to live very frugally or it means that you will never save seriously because your expenses will be way more than they should be.
Second, you can use a formula like the 10 percent rule or the 50/30/20 rule.
Third, you can evaluate your financial goals and what kind of money you need in the next 1 year, 5 years, and 15 years.
There is no one-size-fits-all formula when it comes to savings. Each of the three ways mentioned above may work for someone but not for somebody else.
As outlined above, the first method of saving as much as you can is very informal. It does not instill the discipline that one needs to consistently save and achieve a financial goal.
So, let us explore the second and third options in more detail.
Resources:
- Real Estate Investing School: How to Retire on Passive Income
- How to Increase Your Income and Master Your Money (Saving, Investing, Taxes)
The 10 percent rule
Many financial experts believe that you must save at least 10 percent of income to have any meaningful effect on your financial well-being. The US currently has an average savings rate of less than 5%. So, double that number is a good start.
The 10 percent level is only to get you in a habit of saving regularly and sticking to the plan without quitting.
Once you have saved 10 percent consistently for a year or two, you should then try to push the saving rate up to 15 percent and then 20 percent.
Many experts believe that 10 percent and 15 percent are not high enough a savings rate to set you up for a comfortable retirement.
Not everyone may be in a financial position to start at 10 percent or keep increasing the savings rate every few years.
If that is the case with you, then start with 1 percent or 5 percent. Work your way up gradually. Once you start saving, you will figure out ways to cut expenses and increase your income.
If going up to 20 percent seems impossible, then try and increase your savings rate by 1 percent, 2 percent, or 5 percent. Whatever works for you is the best way to reach 20 percent.
Once you do get to 20 percent, think of pushing the savings rate even higher to, say, 25 percent or 30 percent.
If your financial goals require you to have a high amount in a few years’ time, then you need to save as much as you can. Some people may go as high as 50 percent if they want to fund a comfortable retirement.
The whole idea is to start somewhere and work your way up to as high a rate as you can go.
If you have multiple debts that you are repaying every month, then try and pay off those debts. You will discover how much more you can save when you are debt-free.
Learn –> How to Increase Your Income and Master Your Money (Saving, Investing, Taxes)
The 50/30/20 rule
Similar to the 10 percent rule above, the 50/30/20 rule basically means that you spend 50 percent of your income on essentials (the stuff without which you cannot live), 30 percent on discretionary (stuff that you like but can do without), and save the remaining 20 percent.
This rule has been created by studying the incomes of the average American. They may work for many, but 20 percent may be too low for some.
For example, if you earn a high salary (or a six-figure sum), then 20 percent of your income may not work out to be much. You might be able to save a lot more and invest that money to build big wealth.
On the other side of the spectrum, those who are struggling to get to even 20 percent may consider alternative ways to get to that number. For example, employers offer retirement plans where they match employee contributions up to a certain limit.
So, if you decide to invest 3 percent or 5 percent of your paycheck towards the company-offered retirement plan, then the employee puts up the other 3 percent or 5 percent and you get 6 to 10 percent.
Another way to push up the savings rate would be to look for a part-time gig or a temporary job. Increase your income and save almost all of it.
Evaluate your financial goals
If formulas do not work for your financial needs and situation, then consider conducting a thorough analysis of what you want in your life and how you will get there.
Firstly, figure out how much money you need within the next 1 year. This money could either be for paying taxes, paying for a holiday, or building up an emergency fund. Once you know an estimated amount, figure out how much you need to save to build up that money in the next 2 to 4 months.
Second, work out how much money you need in the next 10 years. This money may be for your education, your child’s education, or for major repair work on your home. Whatever your goals are, figure out an estimated amount and then think about how you can get there by saving for the next 10 years.
Lastly, think about your really long-term goals like retirement. Work out how much money you need when you retire. Then, work backward to arrive at a monthly amount that you need to save today in order to build up your estimated retirement fund.
Finally, you will add up all the saving amounts, from near-term to long-term, and figure out what portion of your income should be saved to achieve all your goals. You can assume that all of your savings will be invested at a conservative rate of return but for different durations.
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