Budgeting & Saving
Saving money is an essential aspect of financial planning. Whether you’re saving for retirement, emergencies, or personal goals, setting aside a portion of your monthly income can provide financial security and peace of mind. But you may still be asking, “How much should I save monthly?” Determining how much to save can be challenging. It depends on factors such as your income, expenses, and financial goals. In this article, we’ll explore ways to focus your savings and offer tips on how much you should save for each category.
Saving for retirement
Saving for retirement is crucial to ensure a comfortable and financially stable future. The amount you should save each month for retirement depends on your current monthly expenses, target retirement date, age, and annual salary.
Use a retirement calculator to determine if you’re on the right track. Just enter your information, and it will give you an estimate of what you should save. Experts suggest saving 10% of your monthly income for retirement. You can do this through a work-sponsored retirement plan, such as a 401(k), or an individual retirement account (IRA). While contribution limits may vary depending on the type of account and your income, it’s a good idea to contribute the maximum amount allowed if you can.
Additionally, check if your employer offers matching contributions to boost your savings. Having a retirement savings goal of 1x your salary by the age of 30, 3x by the age of 40, and 8x by the age of 60 are good benchmarks. However, it’s important to note that these figures are not one-size-fits-all. Your income and financial obligations are unique. Evaluate your personal circumstances and try to adjust your savings goals accordingly.
Saving for an emergency
Protect yourself from unexpected financial setbacks by building an emergency fund. Many Americans don’t have anything saved for emergencies, which can result in added debt if you need to rely on credit cards or loans in times of crisis. To avoid this, it’s smart financial planning to set some money aside so you’ll be prepared when an emergency happens.
Start with a goal to save at least $1,000 as your initial emergency fund. This amount can cover minor inconveniences like car repairs or medical expenses. Continue to build that savings so that your emergency fund may cover at least 3 months of expenses. If you lose your job or a significant unforeseen expense comes up, having this buffer may provide you with financial stability and peace of mind.
Building an emergency fund might be lower on your priority list if you’re focused on paying off high-interest debt or saving for retirement, but it’s crucial to make room in your budget for emergency savings. Even if it’s a small amount to start, it’s better to have the extra cash available when a dire situation arises.
Saving for personal goals
Once your retirement and emergency savings are in a good place, you can start saving for your personal goals. These savings goals can include family vacations, home renovations, or your child’s education. Keep in mind that if you’re carrying debt, it’s important to prioritize your financial responsibilities and strike a balance between how much you put toward your savings and paying off debt.
If you have outstanding high-interest debt, focus on paying it off before allocating funds toward personal goals. By reducing your debt burden, you’ll free up money for future savings. Once your debt is paid off, you can create a budget category specifically for saving toward your personal goals.
According to the 50/30/20 rule, 20% of your income should go toward savings, with 50% allocated for necessities and 30% for discretionary spending. Remember, these percentages are guidelines and should be adjusted based on your priorities. If you want to save more for personal goals, allocate a higher percentage toward savings and reduce your discretionary spending. The key is to find a balance that allows you to achieve your goals while maintaining financial stability.
Where to save your money
There are several options when determining the type of account you want to use for your savings. Different accounts may be better suited for one particular savings goal than another. Choosing the right place to save your money is crucial to ensure it grows and remains easily accessible when needed.
For short-term goals, such as a family vacation or a down payment on a house, a high-yield savings account is a practical choice. These accounts offer competitive interest rates and provide easy access to your funds. They’re a safe and secure option for goals you plan to achieve within a few years.
For longer-term goals, such as retirement or funding a child’s education, consider investing your savings. Investment accounts, including brokerage or retirement accounts, have the potential for higher returns over the long run. It’s important to note that investments come with risks. Consider your risk tolerance and consult a financial advisor before making investment decisions.
Conclusion
Answering the question, “How much should I save each month,” requires careful consideration of your financial goals, income, and expenses. Saving for retirement, emergencies, and personal goals should all be part of your financial plan. Follow these guidelines and adjust them to your specific circumstances, and you can start to develop a savings strategy that aligns with your financial objectives. Even small contributions add up over time, so start today and watch your savings grow.
This article is for educational purposes only and is not intended to provide financial, tax or legal advice. You should consult a professional for specific advice. Best Egg is not responsible for the information contained in third-party sites cited or hyperlinked in this article. Best Egg is not responsible for, and does not provide or endorse third party products, services or other third-party content.