How Much Should I Save Each Month?

You’ve worked hard to reach the point where you can finally start contributing to your nest egg. But, how much should you save each month? There are several rules of thumb, such as the 50/30/20 or 70/20/10 formula, to go by. But determining what formula is right for you depends on your financial situation.

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Establish Your “Why” – What Are You Saving For?

Some financial experts recommend aiming for 10%, while others agree that 20% of your income is the sweet spot. In fact, TIAA-CREF recommends 20% as a rule of thumb, but anything less than that is “not advised.”

But depending on your “why,” this number could be much higher or lower for you.

So, you must ask yourself the following question: what will life look like when you retire?

Maybe you don’t earn a fortune and plan to keep your expenses as low as possible (or even lower during retirement). If so, a goal of 20% may be much more than you’ll need once you’ve retired. But if you’re in this category and plan to spread your wings and explore the finer things in life during retirement, a goal of 20% could be a bit too modest.

On the other hand, if you’re a high-income earner with a load of debt and everyday expenses, you will need to beef up your target to ensure you can survive during the golden years.

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Run The Numbers

Use a retirement savings calculator to determine what percentage of your monthly income you should be saving between now and retirement to meet your goal. This tool can be found on websites like AARP and Edward Jones and paints a clear picture while factoring in the impact of inflation.

Don’t Forget About Your Emergency Fund

When figuring how much money you can afford to stash away in a high-yield savings account, keep your emergency fund in mind. It’s easy to get wrapped up in planning for the distant future. But you want to prepare in the short term in case a financial emergency arises. Plus, it’ll be counterproductive to borrow from your nest egg for an emergency as you may incur fees and penalties.

And Other Large Purchases…

Do you plan to spend on big-ticket items between now and retirement? Maybe you need to save up for a down payment on a new home, buy commercial real estate for a new business venture or load your children’s college fund?

You should also factor in the costs of these purchases when determining how much to save every month. Otherwise, you could set an inflated goal and have to backtrack and readjust later on down the line.

How to Reach Your Savings Goals

Do you know how much your debt is costing you? If the interest rates are relatively high, chances are you’ll pay hundreds if not thousands more in interest over the life of the loan or until the credit cards are paid off. Now imagine how much extra you could save each month if you didn’t have debt?

Start Paying Down Debts

To illustrate, assume you have a credit card with an APR of 19.99% and an outstanding balance of $7,500. If you only make the minimum payment of $200 per month, it will take you 60 months (or five years) to pay off the card. Even worse, you’ll spend roughly $4,500 in interest.

Now, imagine contributing that monthly payment towards your savings accounts for X years. You’d be able to reach your savings goal much faster. And if you doubled that monthly payment to X, you would pay off the balance in 23 months (or almost two years), and you’d save around $2,800 in interest payments.

That’s why you should accelerate your debt payoff efforts sooner than later. And it’s not necessary to pump the brakes on working towards your financial goals while doing so. In fact, it’s best if you do both simultaneously.

Reassess Your Spending Plan

Are there expenses in your budget that can be reduced or eliminated? And is your spending plan realistic? There’s a possibility that a few small tweaks could make it easier to reach your savings goals.

Supplement Income

You can also find ways to bring in some extra dough each month. A few ideas:

  • Work overtime if the opportunity presents itself
  • Find a part-time job that doesn’t interfere with your full-time work schedule
  • Ask for a raise if your performance merits it
  • Put your creative talents to work by freelancing
  • Get a side hustle or complete odd jobs
  • Use financial windfalls wisely

Remember, short-term pain for long-term gain. Even if you only commit to supplementing your income for a brief period early on, you’ll allow compounding interest to work in your favor.

Start Small

Perhaps you’ve done everything you can, and you still can’t save that desired percentage of your income each month? Start small as some effort is better than none at all.

Take Advantage of Retirement Accounts

Not all retirement accounts are created equal, but here are some tips to get the most bang for your buck:

  • 401(k) Retirement Plan – It’s up to you to decide what to contribute, but the amount should at least equal your employer match. Otherwise, you’ll be leaving free money on the table each year. Furthermore, you won’t have the luxury of reducing your taxable income.
  • Roth IRA – Contributions are post-tax, but that means you’ll have more money in your pocket once you retire since Uncle Sam has already gotten his cut. To determine if you qualify or learn more about Roth IRAs, take a look at this detailed guide. More information can also be found in IRS Publication 590-A.

If you don’t have a retirement account, consider opening a money market account to earn a return on your money. You should also consult with a financial advisor to inquire about other investment vehicles that are optimal for your retirement planning.

What if you can’t meet your savings goal?

Start somewhere, but always keep the end goal in mind. As time progresses, you should be able to pay down your debts and use the money saved on interest to save even more. Also, remember that deprivation is not the key and could potentially backfire.

So, start saving money now and take strides towards increasing that monthly percentage. By doing so, you can achieve financial independence and save yourself the frustration of playing catch-up as you get closer to retirement age.

Allison Martin
Meet the author

Allison Martin is a syndicated financial writer, author, and Certified Financial Education Instructor (CFEI). She has written about personal finance for almost ten years and holds a master's degree in Accounting from the University of South Florida.