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. However, determining which formula is right for you depends on your financial situation.
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 much and plan to keep your expenses low (or even lower during retirement). If so, a goal of 20% may be much more than you’ll need once you’ve retired. However, if you plan to explore the finer things in life during retirement, a 20% goal might be a bit modest.
On the other hand, if you’re a high-income earner with lots of debt and everyday expenses, you should increase your target to ensure you can survive in retirement.
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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, borrowing from your nest egg for an emergency 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?
1. 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.
2. 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.
3. 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
- Start 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.
4. 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.
5. 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 a certified financial planner or 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. Furthermore, 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.
Frequently Asked Questions
What are the best ways to save money each month?
Some of the best ways to save money each month include creating a budget and setting up automatic transfers from a checking account to a savings account. You should also cut back on unnecessary expenses and shop around for the best deals.
What should I do with the money that I save?
It is important to have a plan for the money that you save so that it is not wasted. Consider investing the money in a retirement account, building an emergency fund, or saving for a specific goal.
What should I do if I can’t afford to save?
If you can’t afford to save, try to find ways to reduce your expenses or increase your income. It may also be helpful to set up a savings plan that is tailored to your budget and financial situation.
If you have a hard time saving, try to break your goals into smaller increments and reward yourself for meeting them. You can also use saving apps to help you track your progress and stay motivated.
How can I make sure that I save enough each month?
Make sure you have a budget and stick to it. Set up automatic transfers to your savings account and review your progress regularly. This can help you make sure that you are saving enough each month.