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The importance of saving money is clear. It can help you cope with life’s unplanned expenses and set you up for a comfortable future.
How much of your paycheck should you save each month? Well, that depends on your goals. Many experts say to aim for between 10% and 20%, but that’s not a golden rule. So let’s dig into that.
How much should you save each month?
One popular guideline, the 50/30/20 budget, proposes spending 20% of your monthly take-home pay on savings and debt repayment. The bulk of your money — 50% — goes to necessities, and the remaining 30% to wants.
The 20% for savings consists of an emergency fund, retirement and other long-term financial goals, such as paying for a home, a reliable car or your child’s education.
As for the other buckets, the 50% for necessities includes non-negotiable expenses like utility bills and the monthly minimum payment on any debt you have. The 30% for wants is allocated to leisure spending, such as going out to eat or taking a road trip.
Figure out what’s realistic for you
The 20% rule is a good general guide, but it isn’t the right fit for everyone. Some people can save above that rate, while others merely struggle to make ends meet.
“Some people pay their rent and they have nothing left. So how are they possibly going to save 20%?” says Tara Unverzagt, a certified financial therapist and certified financial planner in Torrance, California. “You need to look at your situation to see what is reasonable and what’s not reasonable.”
You can use a budget template to compare your estimated monthly spending and saving totals with the recommended 50/30/20 budget figures. Don’t feel ashamed if you’re saving below the suggested rate or nothing at all.
There may be ways to make more money or cut spending to help you save more. For example, canceling a rarely used gym membership could free up around $40 or $50 every month.
Your income, expenses and goals should ultimately determine how much you’re able to save each month.
“If the goal is to retire at 40, you need to save a heck of a lot more than people who are shooting for 65 because you have 25 fewer years for that money to compound,” says Tess Zigo, a CFP in Palm Harbor, Florida.
Start with something
If saving roughly 20% of your monthly paycheck isn’t within reach, try not to get hung up on that specific number.
As Unverzagt puts it, “any savings is good savings.”
Start with a manageable amount, such as $10 per week or paycheck, she says. Setting aside $10 each week adds up to $520 a year. That’s a solid amount for a starter emergency fund.
Putting savings into a high-yield savings account is one way to leverage compound interest and further grow your savings.
Ideally, you’ll save toward multiple financial goals at once. But if you can’t, it’s OK to prioritize. For example, focus on building a basic emergency fund first, then on saving enough to get the employer match on your 401(k) — if you have one. After that, you can move on to increase retirement contributions or establish a full emergency fund of three to six months’ worth of living expenses.
Can you save too much?
Having a lot of money saved seems like a good problem to have. But it can have disadvantages. For example, if saving gives you anxiety or causes you to take on debt, you may want to dial back.
“There could be a lot of downsides, right? You’re working more than you need to, so you’re giving up time with your family. You’re not spending that time and that money on things that are important to you today,” Zigo says. “You can’t take the money to the grave, so what is the end goal here?”
Keep your values in perspective. Saving for the future shouldn’t come at the expense of your present-day needs and those of your household.
“Maxing out your 401(k) can be appropriate for someone who’s making $120,000 and single with no family. It may not be appropriate for somebody who is not in that situation,” Unverzagt says.
In any case, it’s important not to overshoot your savings. If you tie up too much money in a retirement account and end up needing to withdraw early, you could face taxes and penalties. A retirement calculator will help you work out a realistic number.
Storing too much in an easily accessible savings account, say for an emergency fund, can also backfire. For example, you can miss out on higher returns compared with investment accounts or the tax savings you’d get by directing some of that money to a 401(k) or IRA.
How to save money every month
Whether you want to start saving money or get better at it, here’s some advice:
Pay yourself first. Each time you receive a paycheck, immediately put some of it away for savings before you can spend it on other expenses. This budgeting approach is known as pay yourself first.
Automate. Control the amount and how often you save by automatically setting aside a portion of each paycheck. “The 401(k) is a great place to start because you don’t have to do much,” Zigo says. “The company gives you the website. You just go in and click a few buttons and pick a percent to contribute.”
You can also set up automatic transfers to your savings account or a retirement account through your financial institution or a savings app.
Get professional help: Hiring a financial advisor can be expensive, but there are also ways to get quality free or inexpensive financial advice.
Audit your finances periodically. Circumstances change. So should your approach to saving money. As your income and expenses fluctuate, adjust your savings rate as needed.
» Learn: Different ways to save money
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