How much should I save?

How Much Should I Save?

  • June 1, 2020
  • 6 min read
  • 55 reads

How much should I save? There is no one size fits all answer for this question. This article takes a look at the “recommended” ways to save and alternative suggestions.

50/30/20 rule

You have probably heard of the 50/30/20 rule.

Recommended Income Distribution
50% Living Costs such as food, shelter, transport, insurance, and healthcare
30% Discretionary Spending
20% Savings

Specialists suggest spending 50% on your income on living costs such as housing, utilities, transport and vehicle maintenance, healthcare, and insurance. 30% on discretionary spending and 20% on savings.

While this is a good baseline, it is not a hard and fast rule. For some people, that seems like an achievable goal, but for others, you are probably reading this thinking there is no way I can save 20% of my current income.

The idea behind the 20% saving rule is that with an increase of income over time and compounding interest on investments, you should end up with enough money in your retirement to live entirely financially independent.

That is if you start early enough. How soon should I start saving for retirement? The earlier, the better.

However, paying off student debt and saving for a house deposit and putting aside money for an emergency fund should take precedence over focusing entirely on saving for retirement.

How Much Should I Save Each Month?

Our recommendation is to save as much as you can. If you are young and do not have an emergency fund consider splitting your savings in two.

If you are under 30 years old, then saving for a home deposit and an emergency fund might be your first goal. You may not have to put as much money into your retirement than if you are 50 years old and are starting from scratch to save.

Place half your savings in a 401(K) with your employer. Make sure to save enough to get the full employer contributions. The benefit of this is your employer will match your contributions to a set amount.

The rest of your savings should go into an emergency fund. This will ensure that during tough or tight times, such as a drop in the economy or unemployment, you have enough money to get your household through without going into unnecessary debt.

How much should you have in an emergency fund?

An emergency fund value should equate to at least 3 months of your income saved. Set it aside in a separate savings account that is not easily accessible for a vacation or new car.

If you have a stable and steady income, keep a consistent budget, and set up an automatic deposit straight from your paycheck into your savings account. Your goal should be 20%, but if you can save more, do so.

There may be some seasons of life that you can save more. Increase your savings during that time. Then reassess if things are too tight.

In my early 20’s I wanted to save for a down payment for my first home. For a couple of months, I cut my budget down to an uncomfortable level.

During that season, I lived off oatmeal and $2 Wendy’s burgers. It was only for a short period, but I could do it because I had a goal. There was a house I had my eye on.

It’s not a long-term recommendation, but it sure helped with that final push for the last part of the house deposit.

These days I probably wouldn’t survive off the lack of vegetables. Instead, I would consider a short-term loan. That house’s mortgage repayments were less than rent in the area. Therefore as soon as I bought that house, I freed up a chunk of my monthly income, which allowed me to increase my savings.
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Should I Pay Off My Debt Or Save First?

No matter how much debt you have, always continue to put money away into your 401(K). If you have consumer debt, credit card debt, or student loan debt, pay it off as soon as you can.

Once that debt is paid down, don’t increase your spending to enjoy a more comfortable lifestyle, instead place the money you were putting towards your debt into savings. This spike in savings will help overtime drastically with compounding interest.

If you have high-interest debt, consider consolidating your debt into one lower interest loan. There are multiple loan options when wanting to consolidate.

It can be beneficial in helping you pay your debt down faster as well as saving you a lot of money on unnecessary interest payments.
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Our online loan calculator can help you compare multiple consolidation loans without any effect on your credit score.

How Much Should I Save For Retirement?

68% of Americans are not prepared for retirement. A recent survey conducted by GoBankingRates found that 46% of survey recipients have no savings set aside for their retirement.

It is most people’s dream to become financially independent by the time they retire. But that does not seem to be a dream that many Americans are turning into a reality.

To be Financially Independent means you have enough income coming in from passive investments that allows you to live and sustain your preferred lifestyle without having to work.

Knowing how much money you need to save for retirement will depend on the lifestyle you want to live in your older years.

For some, they will want a house, a vehicle, and enough spare money for a comfortable living. For others, they will want a beach house and a yacht.

So first things first, figure out what kind of lifestyle you want then work backward from there. Be realistic with a maintainable lifestyle and work out a monthly budget for that type of lifestyle.

Then take a look at our compounding interest calculator. Enter your personal information such as how much you have already saved, how much you can afford to save per month, and what return you are expecting to get from your saving portfolio.

This will give you an indication of what your final balance will be when you retire. Take the final amount of what you can save, say $1.5M, and place it in a safer investment for retirement at  5%, you would receive $75,000 income a year from that investment during retirement and have something to leave your kids.
Compound Interest Calculator

How Much Of My Paycheck Should I Save?

The most significant statement received from the GoBankingRates survey was, ‘I don’t make enough to save.’ While this may be true to some extent, consider how to change that on a personal level. Is there a possibility of upskilling, taking college courses, or a part-time job? Saving today is the foundation of a stable future.

One recommendation is to save the equivalent of your annual income every 5 years. If you earn $60,000 per year, you should deposit into your savings $60,000 every 5 years.

This plus compounding interest will set you up for a very financially peaceful retirement. This saving doesn’t have to be in the form of a savings account; it could be used to purchase a rental property or placed in an IRA.

Bottom Line

Save whatever you can, as soon as you can. Always pay into your 401(K) to match your employer’s contributions. It is literally free money.

Keep focused on what you are saving for and make sure you know what returns you are getting in interest on your savings. Remember to look for those two magic words, “Compounding Interest.” One last thing.

Make sure you have your savings in the right investments. Do not keep them in a 1.6% interest bank account. There is no need for uncalculated risk but you do want to be getting an interest return on your savings.

Have you saved for your retirement? What’s your plan to create financial freedom for your household? Comment below.

Author Kimberley Smyth

Kimberley is the US Country Manager for Financer.com. She has gained years of experience in small business management and has two successful start-ups under her belt. She now focuses her energy on helping others achieve financial freedom through smart money management and investment opportunities.

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Last Updated: June 1, 2020

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