Updated July 11, 2018 10:36 AM PT

How Much Should I Save?

Read more about How to Save Money

For good financial health, you should aim to save 20% of your income. But even if you can't, every penny counts. Read on for tips on how to achieve that.

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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Rule of thumb: 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 based on the 50/30/20 rule, where 50% of your income goes towards necessities, 30% goes toward fun spending, and 20% towards savings.

How Much Should You Save Each Month?

The numbers are shocking. According to a study conducted by TD Bank, 33% of Americans live paycheck-to-paycheck. We're not just talking about Gen Z either. In fact, among those studied, Gen X have saved the least. Yes, even people in their 50s still live paycheck-to-paycheck.

What's the takeaway? If you aren't saving yet, you aren't alone. But a big part of the problem is not knowing how much to save.

Is there a magic number? Nope. That would be too easy.

Instead, there's a basic formula. But even that might vary. If we told you to save 50% of your monthly income, you'd probably shake your head. We get it. Not many people can save that much. Don't beat yourself up for not saving enough. Instead, continually work to reach your goal.

So what should your goal be? Read on to learn the formula we recommend you use.

Rule of Thumb

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We like the 50/30/20 rule.

This means your budget should look like this:

  • 50% of your income for fixed expenses
  • 30% for variable costs
  • 20% for savings

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.

Each situation has a different answer. It's why no two savings plans are identical.

Everyone starts by setting priorities.

If you have a lot of high-interest debt, you need to pay it off. You shouldn't put your entire 20% towards the debt, though. Just give it a top priority.

Prioritize your debts 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.

Later we discuss how much you should save for emergency and retirement.

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.

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
  • 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.

Large Purchases

Your savings goal should also include money for large purchases. A few examples include:

  • Purchasing a house
  • Purchasing a car
  • Taking a vacation
  • Paying for college

With the exception of vacation, you probably won't pay for any of these things outright. There are loans available for each. But, the less you borrow, the less interest you pay. This leaves you with more discretionary income on a regular basis. In the end, it pays to save for these large purchases.

Deciding how much to save and for what requires prioritizing. For example, if you have young children, college savings isn't a priority. If you don't have a home or need a car, those items will take top priority. Think about what you need the most and plan accordingly.

Where to Save Money

You know what you are saving for, but where do you put it? Saving accounts give negligible amounts of interest. They won't get you toward your savings goals. You need an account that will make you money. How soon you need the funds matters, though. Emergency funds, for example, should be liquid (that could be what you use a savings account for). You need to be able to get to your funds if and when an emergency arises. Retirement funds, on the other hand, are not liquid - you'll get stuck with a penalty and taxes if you try to tap them and it could take you a while.

Here's what you need to know about funding your retirement and saving for large purchases.

Retirement Funds

  • 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.

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.

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.

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