Updated July 9, 2019

How Much Should I Save?

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How much of my income should I save? Depends if it's for retirement, a house, college, a car or other goals. Find out how the 50/20/30 rule can help you.

What you save is much more important than how much you make. You can make millions, but if you don't save, you won't come out ahead. But do you know how much you should save?

We answer these questions and more below.

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How much money should you save from your paycheck?
A good rule of thumb is to save 20% of every paycheck (your take-home income). For example, if you earn $1,500 every two weeks, you would save $300. This is a good start, but it may not be right for you. We explain below.

How Much Should You Save Each Month: Rule of Thumb

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There is no magic number, but there is a basic rule of thumb. It's called the 50/30/20 Rule.

This means your budget should look like this:

  • 50% of your income for necessities
  • 30% for fun spending (your wants)
  • 20% for savings

This is to be calculated with your after-tax (take-home) income.

This doesn't mean take 20% of your income and invest it, though. Sure, that would be nice. But it's probably not realistic. Instead, budget 20% of your income to help improve your financial status.

Tip: What does improve your financial status mean? It means pay off debt and save for retirement. It also means save for large purchases. The fewer loans you need, the better off you are.

Next we'll discuss financial priorities and why you need them.

Creating Priorities

So now you know you should save 20% of your income. What do you do with that 20%, though? You must prioritize the funds.

No two people will have the same strategy. It depends on the following factors:

  • How much debt you have.
  • How much you have saved in an emergency fund.
  • How much you have saved for retirement.

The answers to these questions help you decide where your money should go.

If you have high interest debt, you must pay it off. If you have nothing saved for emergencies or retirement, you must start saving. You can tackle all issues a little at a time by setting priorities.

You may have no debt, but also no money saved. That's not ideal. Maybe you have a lot of debt but plenty of money saved. It's still not ideal.

Prioritize your savings as follows:

  1. Emergency fund
  2. High interest debt
  3. Retirement funds
  4. Large purchases

If you already have an emergency fund, make high interest debt your focus. The same goes for any other items in the list. This list should give you an idea where you should focus your 20% savings.

Now, the trick is creating a budget for these top priority items. You need to take that 20% and divide it accordingly.

This is what gets people in trouble. Oftentimes, debts exceed 20% of a person's net income. Rather than dividing the 20% up, they put it all towards their debt. What happens when they have an emergency? They don't have any emergency funds to help. The debt cycle just continues.

We discuss how much you should save for each situation.

How much does the average person have in their savings account? Americans aren't the greatest savers. The average bank account balance is $4,463. In a CreditDonkey survey, we found that 39% of people don't have over $500 in savings. 52% have under $1,000.

When Do You Need the Money?

Now you know your priorities. Next, determine when you need the funds. Following are the most common examples:

  • Retirement: You don't need retirement funds until you are of retirement age. But you are never too young to save for it. The difference is how much you save. The older you are, the more aggressive your retirement savings should be. You may allocate more funds towards retirement and less towards emergency funds.

  • Education: How soon will your children be in college? If you still have babies, you don't need the money anytime soon. You can move this one down on your priority list. Don't move it off the list, though. Emergency funds and high interest debt must come first. If not, you'll never have the funds for a college education.

  • Down payment on a house or car: Consider how soon you'll buy a house or car. If it's within the next 2 years, you'll need an aggressive savings strategy. If you don't need the money soon, you can prioritize other savings.

Knowing the timeline can help you create the right strategy. It doesn't mean you ignore any accounts. Constantly strive to add to each account a little bit at a time. Every penny counts! As the interest compounds, your small investments turn into big money.

Look for a savings account offering high interest. This will help your money to grow. Compound interest means that your interest will earn interest, so your savings will grow even faster.

Emergency Savings

Emergency savings are crucial. Ideally, they help keep you afloat if you lose your job. They may also help during car, home, or medical emergencies.

So how much should you save? You can't ever have too much! Try saving 3 to 6 months' worth of your expenses at first. When you figure out your expenses, you don't have to include variable costs. In an emergency, it's likely you'll give up things like:

  • Eating out
  • Entertainment
  • Vacations

Things you must still pay for include:

  • Housing (mortgage, insurance, utilities, etc.)
  • Transportation (car payment, insurance, maintenance, gas, etc.)
  • Food
  • Healthcare
  • Personal debt

Look closely at your budget and determine what you "must" pay for every month. You can then strive to save that much.

Should you ever save more than 3 to 6 months of your expenses? There are certain situations where this is warranted. Of course, no one ever said they had too much money set aside. But certain people should save more. They include:

  • People with irregular income (freelancers, seasonal business employees)
  • People who work in an industry with frequent layoffs

If you fall into either category, try saving closer to 12 months of expenses.

How much money should you keep in savings? We recommend striving for 6 months of living expenses. This is a safe estimate for in case you lose your job. So if your necessary expenses per month add up to $3,000, you should aim to save $18,000. This is money that should be in a separate savings account and not to be touched unless you do have a real emergency.

Retirement Savings

Saving for retirement is a long-term plan, and it's smart to start as early as possible. The goal is to save enough to live off of for the rest of your life after you retire.

There is a simple rule of thumb called the "Multiply by 25 / 4% Rule".

  • Save 25x your annual expenses. So if your annual expenses are $40,000, then you'll want to save $1M.

  • Assuming a 4% return, you can safely withdraw 4% of your retirement savings every year. This will ensure that you won't run out of retirement funds. This rule also allows you to adjust for inflation.

So how much do you need to save now to reach this goal? This depends on how much you can save each month and when you start saving.

How is how many years it will take for you to save 25x of your annual expenses, assuming a 5% annual return on your savings.

We cannot possibly know what your annual expenses are. So for simplicity's sake, we're going to assume your annual expenses = your annual income. In reality, your expenses are most likely lower, so you probably don't need to save for quite as many years. The lower your expenses, the less you need to save.

% of income saved# of years it'll take to save 25x
5%67 years
10%53 years
20%41 years
30%34 years
40%29 years
50%26 years

As you can see, it'll take 41 years to save that 25x if you save 20% of your income every month. So if you start saving at the age of 25, you'll be on target for retirement by the time you're 66.

If you don't start until you're older (like 40), you'll need to save more aggressively.

Saving for a House Down Payment

Saving for a house down payment requires a very large amount of savings. You want to aim for a 20% down payment in order to avoid paying Private Mortgage Insurance.

So how much do you need to save? Here are a few things you need to figure out.

  1. How much housing payments you can afford. First, you need to know how much you can afford in housing payments each month. The best rule of thumb is that housing expenses don't exceed 28% of your gross monthly income. This includes the mortgage, property taxes, homeowner's insurance, and HOA fees (if any).

    For example, let's say you make $75,000 per year ($6,256/month). 28% of that is $1,752. That is your maximum total monthly housing payment.

    Let's say property taxes for your area is at around $5,000 ($417/month) and annual homeowner's insurance is $950 ($79/month). You want to subtract those from the total monthly housing payment.

    $1,752 - $417 (taxes) - $79 (insurance) = $1,256 per month for your mortgage payment

    Assuming a 5% interest rate, you can estimate your mortgage payment to be $550 for every $100,000 you borrow.

    $1,256/$550 = 2.28
    $100,000 x 2.28 = $228,000 mortgage

  2. How much down payment you should save. After you have an idea of how much mortgage you can afford to take out, work backwards to figure out the down payment you'd need. Remember, you want at least 20%.

    For a $228,000 mortgage with a 20% down payment, you would calculate the following:

    $228,000 / 0.80 = $285,000 (total house cost)
    $285,000 - $228,000 (mortgage) = $57,000 down payment

  3. When you want to buy. This determines how aggressively you have to save. If you want to buy a house in 5 years, that means you need to save $11,400 a year, or $950 a month. Is that reasonable for you? If not, adjust your timeframe.

We've got a more detailed guide on how to save for a house.

Saving for a Car

Cars can be emotional purchases. You may be tempted to get your dream car. But if you're not careful, you may stretch your budget too thin and have trouble paying it off.

So how much should you spend? There is a good rule of thumb. It's called the 20/4/10 rule:

  • Save up 20% down payment for the car
  • Finance no longer than 4 years.
  • Spend no more than 10% of your gross monthly income on car expenses. This includes car loan (principal and interest) and car insurance.

If you make $60,000 a year, that means your gross monthly income is $5,000. 10% of that is $500/month on car expenses.

Let's say insurance each month costs $100. So that leave you with $400/month on your auto loan payment. With a 4% interest rate, you can take out a loan of $17,716 (search for a car calculator).

Working backwards, if you save 20%, you can purchase a $22,145 car, with a $4,429 down payment.

Part of being financially responsible is making your "fun" money go farther. Flagstone Financial Management explains how buying experiences rather than things is a great way to get the most out of your budget.

Saving for a Vacation

A vacation is categorized under "fun spending." Remember the 50/30/20 rule we talked about earlier? 30% of your take-home income can be used on wants.

If you want to save for vacation, then it needs to come out of that 30% "fun spending." This means you need to prioritize and cut down on other wants.

Open a separate vacation fund. Every month, deposit some money into it and try not to touch it.

For example, let's say your take-home pay is $3,000 a month. This means you have $900/month on wants. You can save $500/month for your vacation and still have $400/month left for other wants such as eating out, shopping, and movies.

Here are a few things to consider when deciding how much to save for your vacation.

  • Where do you want to travel? Certain destinations will be a lot more expensive than others (like Norway vs. Costa Rica). Do research to see how much food and sightseeing cost in your destination.

  • How much are flights? If your dates are flexible, you have a better chance of finding the cheapest flights. See our top tips to save on airfare with Google Flights.

  • What kind of accommodation? You have a huge range of options here. Hotels will usually cost the most, while Airbnbs can save you money.

After you estimate the trip cost, you will get a better idea of how much you need to save each month. Or how long you will need to save to reach your goal.

How to save for vacation faster: One of the fastest ways to save for vacation is through credit card rewards. You can receive a large bonus or airline miles after meeting the minimum spend requirement. That can go a long way into jumpstarting your vacation fund. Often the bonus is enough for a flight.

But you have to spend first in order to get the bonus. So make sure it makes sense for you and that you can pay if off.

Where to Save Money

You know what you are saving for, but where do you put it? You need an account that will make you money. Different savings goals will require different accounts.

Create different savings accounts with different goals. Create an emergency account and then savings accounts for each goal (i.e. Student Loan Account, Down Payment for a House Account, Engagement Ring Account).

Then, depending on the account and how far off the goal is (i.e. buying a house may be 5 or 10 years down the road), invest that money in a CD or another high interest yielding account.

Sarah Moe, business and crowdfunding coach, iFundWomen

Here's what we recommend.

Saving for Emergencies

Emergency funds should be liquid. You need to be able to get to your funds if and when an emergency arises.

There is a rumor out there that $1,000 is enough for an emergency fund. When you add up any bills that are quarterly or semi-annually, self-care, family obligations, gifts, and maintenance on home or cars, it is very likely going to be more than $1,000.
Brie Sodano, Personal Financial Strategist, Sheep to Sharks

We recommend you store your emergency savings into an online savings account. Online banks can offer much higher interest rates because they have less physical overhead. This will allow your money to grow a little.

You can still access your money when you need it. Though keep in mind that the FDIC limits you to 6 withdrawals a month for savings accounts.

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Saving for Retirement Funds

Retirement funds are not liquid. You'll get stuck with a penalty and taxes if you try to tap them early.

  • 401k: Start with your employer sponsored 401(k). Contribute as much as your employer will match. Even if it's only a percentage of your contribution, take it. These funds are pre-tax, so it saves your tax liability.

  • Traditional IRA: If you don't have an employer-sponsored 401(k), open an IRA. You can deduct the amount of your contributions on your taxes for that year. You pay taxes when you withdraw the funds. The IRS sets limits for the contributions each year.

  • Roth IRA: This works much the same as a traditional IRA. The difference is when you pay taxes. This IRA doesn't provide you with a tax deduction for the year you contribute. However, your withdrawals are tax-free. This account also has maximum contributions each year.

How much should a 35 year old have saved? By age 35, financial experts recommend to have twice your annual salary saved, in order to be on the right track to retirement. So if you make $50,000 a year, you should have $100,000 saved. By age 40, that amount should grow to 3x your annual salary.

Saving for Children's Education Funds

  • 529 Plan: This plan provides tax advantages just for saving for college. Just like a 401k, you choose the portfolio type and risk level. Some states allow tax deductions for your contributions. You don't pay taxes on investment growth or qualified withdrawals.

    Did you know: Qualified withdrawals are money used on qualified college expenses. Tuition and room and board are a couple of good examples.

  • Prepaid Tuition Plan: Money saved in this account goes towards tuition at a public in-state university. This plan helps you lock today's tuition rates in for your child. You may have the option to transfer the credits to a private college if the need arises.

  • ESA: The Education Savings Account provides similar tax benefits as the 529. This includes tax-free growth and withdrawals for qualified expenses. This account has a little more investment flexibility, though. It also allows use of the funds for certain K-12 expenses.

Large Purchases

  • ETFs: Exchange traded funds mimic a specific index. They are a mixture of securities. You can trade them throughout the day. Some trade commission free. They also offer manageability regarding capital gains, which may mean a lower tax liability.

  • Mutual funds: This investment offers diversification in one fund. You receive a combination of risky and non-risky investments in one fund. Consider your timeline before choosing a mutual fund. Index funds help fund long-term goals. Target date funds help you meet your goal date. They adjust the risk level as you get closer to the target date.

  • Stocks: If you have a high risk threshold, stocks can be a good choice. Stocks often offer a more aggressive investment approach. You must have a threshold for risk if you invest in them. Longer-term investments usually fare better than shorter-term.

What to Do If You Can't Save Enough

Don't panic if the numbers thrown around here aren't something you can achieve. Not everyone can allocate 20% of their income right off the bat. Maybe you are stuck in some bad habits or you think you must pay your debt off first. Either way, you can change; it just takes time.

Make small changes. Remember when we said every penny counts? It's true. If 20% is too much, break it down even smaller. Even if you can only start saving 1% of your income, do it for around 6 months. During this time, it should become natural. You can then start increasing your savings. From 1% go to 5% and continue increasing until you hit that 20%.

What if you live paycheck-to-paycheck? You have options. Changing your strategy may help. Securing a second job until you get ahead may help. If you don't want to start a second job, consider making passive income.

You don't have to stick to the plan, though. Life happens. You must adjust.

Let's say you hit an emergency before you stock your emergency fund. You can stop contributing to savings. Take care of your emergency and come back to your savings plan when you can.

Always strive for that 20%, though. It will keep you motivated, giving you something to work towards.

Though saving can be hard, it's important to stay focused. This blog from The Froogal Student explains how the 'millionaire mindset' of maximizing income and minimizing expenses is the key to financial independence.

What to Do When You Hit Your Goals

Maybe you get lucky enough to hit your goals. Then what? Just keep going. Don't give up! If you are comfortable with it, increase what you save. No one says you can't go above the traditional 20% savings. If you have an emergency fund already, save for retirement. You can't predict inflation. You may need more than you think.

Don't make the mistake of getting too comfortable. You'd probably rather have too much money than not enough!

The Final Word

Look at your income and see how you can start saving 20% each month. Then allocate the funds accordingly. Don't expect big changes overnight. Saving takes time and diligence. Use these tips to help you get started. Set your priorities and then don't give up. Eventually you'll have a nice nest egg for emergencies, retirement, and more.

Disclaimer: Opinions expressed here are author's alone. Please support CreditDonkey on our mission to help you make savvy decisions. Our free online service is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content.

More from CreditDonkey:

How to Save Money

How to Invest Money

How to Build Wealth in Your 20s

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Chad Parks knows first-hand how hard it is for small businesses to succeed in today's economic landscape.
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