We all know saving money is important. We’ve all gotten the memo.
Where the picture starts to get fuzzy for most people is figuring out exactly how much they should save … and where they should be saving that money … and for that matter, what exactly they should be saving for in the first place.
Today, I’m going to try to help you take the vague guidance you know and turn it into something more specific and actionable.
I’m going to help you dig into the question “How much should I save?” To be clear: There’s no magic one-size-fits-all savings amount that applies to every person. But I can help you figure out that number, or percentage, for yourself, and even adjust it over time.
And while I’m at it, I’ll provide some other related information, including how to think about savings goals, how to determine which accounts make the most sense for your savings, and more.
Let’s get started.
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Table of Contents
How Much Should I Save Each Month?
We’ll start with the obvious: The proper amount to save each month varies from person to person. You don’t have the exact same needs or restraints as your neighbor, so why would your savings goals be identical?
To get to that magical dollar amount, you need to consider a host of different factors. But we’ll try to keep it simple. To start, when you’re asking yourself “How much should I save?” consider the following:
— How much you can afford to put away. Ultimately, we all have limitations on just how much we can save. If you make $100,000 a year, it would be virtually impossible to save $100,000 a year. So your monthly expenses are a significant factor in how much you can save.
— Your savings goals. You should have a mix of short-, medium-, and long-term financial goals. For example, funding an emergency account (short), buying a new phone (medium), and saving for retirement (long).
— Your time horizon. Your time horizon is the amount of time you can wait before you think you’ll need to access your money. It applies to all financial goals, from short- to long-term. And it affects how aggressively you need (or can afford) to save toward your goals.
— Your future lifestyle. Specifically as it pertains to retirement, the lifestyle you expect to maintain will say a lot about how much you need to save. A person who plans to live frugally during retirement—a modest house, occasionally eating out at restaurants, rarely traveling—will need to save far less than a person who wants a leisurely retirement and plans on seeing the world.
More details on these factors are explained in the sections below.
How Much Can You Afford to Save Each Month?
A surprisingly common method of saving is to just stash away whatever is left over each month after necessities and discretionary purchases have been made. But that’s hardly a plan.
If you’re going to get serious about saving, you need to make saving a part of your budget.
One popular budgeting technique that factors in savings is the 50/30/20 Rule. This rule looks at your budget in terms of percentages, making it easy to adjust your spending and savings if your current income changes.
The 50/30/20 rule suggests that:
— 50% of your monthly income is allocated to essential expenses such as rent, food, taxes, transportation, and health insurance.
— 30% is discretionary money, which can include non-essential goods and services, ranging from dining at restaurants and going on vacations to buying video games or streaming subscriptions.
— 20% goes toward savings. Or, if you’re paying off debt (say, student loan debt), this would go toward either both savings and debt repayment, or even just debt repayment, until the debt is wiped clean.
It’s a handy method, but again, each person’s specific financial situation is different. For instance, you might have no choice but to spend 60% of your income on essentials—or even more if you have a low income and live in a high-cost-of-living area. Or if you feel like you’re behind on your long-term savings, you might only allocate 20% to discretionary spending and 30% to savings. Or if you’re paying off high-interest debt, you might want to re-allocate all money that would ordinarily go to savings to paying off that debt.
Related: How to Save Money on Groceries: 12 Commonsense Tips
What Are Your Goals?
A few financial goals are nearly universal: Most everyone could use an emergency fund, for instance. Same goes for retirement savings.
Other goals may vary. Owning a home is more important to some people than it is to others. Some people want to take long international trips. Some people want an extravagant wedding.
So, make a list of any financial goals that are important to you. Do you want to save money for a lavish vacation? Do you plan on saving money for your child’s future education?
And make sure the goals are specific. “Saving money for retirement” is a good start, but it’s too vague. Instead, try something more exact. “I want to contribute to my company’s 401(k) up to the employer match” or “I want to save enough to travel four times a year in retirement.”
Importantly, you can have multiple savings goals at any given time. And, as you’re about to read, these goals can (and should) be broken up into time categories.
Related: 10 ‘Frugal’ Habits That Aren’t Actually Saving You Money
Time Matters
The next consideration is time horizon. Let’s say you’re saving up toward a goal you expect to meet in one year. You might be extremely conservative with how you invest that money, because if the value of those funds suddenly goes down, you might not be able to achieve your goal. However, if your goal is, say, retirement, and you won’t retire in 40 years, you can afford to be much more aggressive and wait out market ebbs and flows. After all, you won’t need any of that money for several decades.
Goals are typically broken into three time categories:
Short-Term Savings Goals (Less Than 1 Year)
At any given time, you might have several short-term savings goals in mind, such as buying an expensive concert ticket or an engagement ring.
But short-term savings aren’t just for the fun stuff. You’ll also want to use them to cover the nasty surprises life holds.
If you don’t already have an emergency fund, that should be a high-priority short-term savings goal. In the event you have an unexpected medical need, your vehicle breaks down, you lose your job, or any other urgent expense comes up, you won’t need to, say, put the expense on a high-interest-rate credit card and then get buried in debt payments—you can simply pull money from the emergency fund and pay your bills right away.
The standard guidance is to build an emergency fund that can cover three to six months’ worth of your expenses. Some people try to save even more for added peace of mind.
Given the short-term nature of these goals, any savings should be stored in an easily accessible account like a checking or savings account. If you want to make a little profit while you save, a high-yield savings account would work, as would a certificate of deposit (CD) as long as its term expires before you’ll need the money.
Medium-Term Savings Goals (1-5 Years)
Medium-term savings goals include things such as a car or a wedding, though they can also include milestones toward long-term goals. For example, you might want a certain amount saved toward your future home within the next three years, but still be seven years away from homeownership.
Medium-term goals can often go overlooked—they’re not as immediate as short-term goals, and there aren’t specialized vehicles for medium-term goals like there are for the long-term goal of retirement savings. But they’re important nonetheless, so give them the attention they deserve.
To reach medium-term savings goals, people generally use the same vehicles they use to reach medium-term goals. If your goals are on the longer end of the medium-term spectrum, you might also consider investing, which can grow your money more rapidly, but be mindful of risk and choose your investments wisely.
Long-Term Savings (5+ Years)
The most significant long-term financial goal for most people is saving enough money for retirement. To that end, it’s never too soon to start putting money in a retirement account (or two). If your workplace offers employer contributions, all the better.
However, retirement isn’t the only long-term savings goal. Other such goals can include saving enough for a home down payment or saving for your children’s education.
It’s typically best to start early and save regularly for long-term savings needs to slowly dial down the sticker shock of these costs.
Also, because these goals have the longest time horizons, you can afford to be more aggressive. People typically put savings for these goals in investment accounts.
Related: 13 Dividend Kings for Royally Resilient Income
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Expected Lifestyle
One of the most important factors in knowing how much to save for retirement is understanding what kind of lifestyle you want during your post-career years.
Think about your current lifestyle: How big your house or apartment is, how often you go out to eat, how many cars you have, how often you take vacations, and so on. Does this look like how you’ll want to live in retirement? Do you think you’ll want to downsize your home? Travel more frequently?
And as unpleasant as it sounds, you’ll also want to consider expenses you don’t currently incur. Do you think you’ll have high health care expenses in retirement? Do you think you’ll be able to live in your home, or will you need assisted living or other specialized care?
Your savings goal will have to be enough to finance this lifestyle in retirement.
Related: The 24 Best ETFs to Buy for a Prosperous 2024
2 Ways to Tell If You’re Saving Enough
Once you’ve considered all of the above and come to at least a rough number, there are a couple of quick checks you can do to tell whether you’re saving enough.
Safe Withdrawal Rate
One way to evaluate the adequacy of your retirement savings is to see if you can withdraw enough each year to support your desired retirement lifestyle without depleting your nest egg prematurely. As a general rule of thumb, 4.7% is considered a safe withdrawal rate for many retirees.
After you have a sense of how much you’ll be able to save for retirement, and how much you’ll need to pull out of your retirement savings each year, use the formula in the above image to calculate your withdrawal rate.
If your expected withdrawal rate is significantly above 4.7%, consider squirreling away more money for retirement.
Of course, while the 4.7% withdrawal rate can serve as a good rule of thumb, it has some limitations and can vary based on your age at retirement and your retirement portfolio mix.
The 80% Rule
The 80% rule is another common benchmark for retirement savings. Under this rule, estimate your annual retirement costs at around 80% of your pre-retirement income. So, for example, if your pre-retirement annual income is $100,000, you should expect your annual retirement expenses to be around $80,000.
Knowing this amount should help you calculate how much money you need to save for retirement. But there are a couple important caveats to keep in mind.
For one, you won’t necessarily spend 80% of your pre-retirement income each year after you retire. You could end up spending more or less, depending on your lifestyle goals and where you choose to live. But it’s a decent rule of thumb.
Also, this number will look a lot different depending on when during your life you calculate this number. If you calculate the 80% rule when you’re first coming out of college, it’s likely your income is much less than it will be during your 40s and 50s. So if you do follow the 80% rule, you’ll want to reevaluate it throughout your life.
Related: How Long Will My Savings Last in Retirement? 4 Withdrawal Strategies
Where to Put Your Savings
All right! You’ve determined your various savings goals and you’re ready to start socking money away. So for the next 40 years, you’ll tuck all of your savings away into your savings account, right?
Wrong.
To start, it’s important to separate your money unless it’s a hybrid account designed to fulfill various needs. If you have a standard checking account, don’t save your money there—it’s too complicated to mentally keep track of what every dollar is assigned to do.
Also, different types of accounts work better for certain goals, and worse for others. So you’ll want to utilize several savings vehicles depending on your goals.
For instance, savings accounts are great for short-term savings goals because you can easily access your money from them whenever you want. But they’re not great for long-term retirement goals because they earn extremely little money. Conversely, 401(k)s are great for long-term retirement goals because they allow you to invest and grow your funds, not to mention they offer tax advantages that make them more efficient than, say, traditional brokerage accounts.
Here are a few popular account types to keep in mind. This isn’t an exhaustive list, but a few examples showing how different accounts are suitable for different goals.
High-Yield Savings Accounts
High-yield savings accounts (HYSAs) are an excellent place to store money for short-term savings goals, such as an emergency fund.
HYSAs earn much more interest than you can make in a traditional savings account, but your money is every bit as safe. There’s no investment risk, and your money is insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA).
While some HYSAs limit the number of transactions you can make in a month, that’s still more than enough liquidity for anyone who plans to only withdraw money in an emergency or for some other short-term goal.
The Bread Savings High-Yield Savings Account is a free, FDIC-insured account that offers an extremely competitive APY that currently beats the national average by a decent margin. You’ll also get to save a lot more of your money thanks to Bread’s wallet-friendly fee policies. Bread doesn’t charge a fee for monthly maintenance, online statements, ACH transfers, or incoming wire transfers. You can also make unlimited ACH and mobile check deposits.
Brokerage Accounts
Brokerage accounts are a great fit for mid-term savings, and they can also be used for long-term savings.
Brokerage accounts provide access to a variety of assets that can help you grow your money at varying levels of risk and reward. Typically, brokerage accounts allow you to buy stocks, bonds, exchange-traded funds, and mutual funds, though depending on the account, you might also have access to options, futures, commodities, cryptocurrency, and other assets.
Brokerage accounts don’t offer the tax advantages of retirement accounts (covered below), but they provide more freedom. Specifically, you can withdraw money when you want without triggering tax penalties—perfect for medium- and long-term goals such as financing a wedding or a down payment on a house.
E*Trade offers commission-free stocks, ETFs, thousands of mutual funds, and even Treasury trades. Additional investment selections include corporate bonds, options, money market funds, futures, E-mini futures, and foreign exchange (forex), and you can even participate in some initial public offerings (IPOs) through the E*Trade platform.
Retirement Accounts
Retirement accounts refers to tax-advantaged accounts that are specifically designed with retirement in mind. These include 401(k)s, individual retirement accounts (IRAs), and Roth IRAs.
Retirement accounts typically provide certain tax advantages, such as tax deferment or tax-free withdrawals, that help retirement savers retain more of their hard-earned money. They vary in flexibility, though—401(k)s typically only let you invest in a handful of mutual funds, while IRAs and Roth IRAs allow you to invest in virtually anything you’d find in a taxable brokerage account.
While great for retirement savers, retirement accounts are a poor place to stash money for short- and medium-term goals, as well as many long-term goals. With a few exceptions—for instance, first-time homebuyers can withdraw $10,000 from a 401(k) or IRA to put toward a new home—withdrawals made before retirement will not only be taxed, but also incur a 10% tax penalty. So don’t build an emergency fund or save for a new car in a retirement account.
Related: Should I Pay Off My Mortgage Before I Retire?
Ways to Start Saving
The sooner you begin saving money for future expenses, the better. Here are a few things you can do to get started:
Make a Budget
As I mentioned above, you’ll want to make a budget that includes not only your essential and non-essential expenditures, but also the amount of money you want to save on a regular basis.
Start by adding up all of your essential monthly expenses, then subtract that sum from your take-home pay. The number that’s left over is how much you can allocate to nonessential expenditures and saving.
And remember: A budget isn’t a static document. You’ll need to adjust it over time to account for pay raises, bonuses, higher costs, inflation, and other factors.
Pay Yourself First
If you want to be serious about saving, determine how much you’re going to allocate to saving before you decide what to allocate to recreational expenses.
Also, if you have debt, consider the interest rate. Let’s say your credit card debt racks up a higher interest rate than what you could reasonably earn from a savings account, CD, or even investing—your savings allocation should instead go toward paying off that high-interest debt. Once you’ve paid off that debt, then begin saving.
Automate Your Savings
Once you’ve determined how much of your monthly income should be allotted to different goals and financial accounts, it’s easy to automate your savings.
For instance: You can typically elect to have a paycheck directly deposited into more than one account. If you currently have your check deposited into a checking account, change your directions so your predetermined savings amount is sent to a savings account, and the rest is sent to checking.
If you have a 401(k), you just need to select what percentage of your paycheck you want to contribute every pay period, and that amount will automatically be deducted. Most other investment accounts, like IRAs, allow you to set up automatic contributions from your bank account.
If you want to automate your retirement savings, it’s difficult to get any simpler than Wealthfront. Wealthfront is a robo-advisor platform that allows you to invest in pre-built portfolios—with different themes and goals—in taxable accounts as well as individual retirement plans.
Wealthfront’s primary offering is ETF-only portfolios that provide varying types of exposure depending on your risks and interest. The portfolios buy fractional shares of ETF index funds tracking benchmarks like the S&P 500 to keep you invested in stocks and bonds.
Speak With a Financial Advisor
If all of this sounds a bit overwhelming, it may be useful to speak with a financial advisor who can put you on the right track. An advisor can help you create realistic financial goals, devise a strategy for how to reach those goals, help you figure out what accounts you’ll need, and even advise you on investment decisions.
Just remember: Financial advisors often charge fees or a commission, or have fees taken out of the assets they’re managing.
Related: Do I Need a Financial Advisor? 7 Questions to Ask Yourself
Is It Possible to Save Too Much?
People are far more likely to underestimate how much they’ll need for future living expenses and long-term goals than they are to overestimate that sum. And in general, it’s wise to save more than you expect you’ll need.
That said, it’s still possible to save too much.
Similarly to how much you should save, there’s no hard number for what constitutes saving too much. Instead, consider this guidance: If you’re saving so much that you’ll clearly eclipse your savings goals by a wide margin, but in doing so, you’re missing out on a lot of opportunities today that might not be present when you’re older, it’s possible that you’re saving too much.
Don’t mindlessly forsake the now for the later. You truly never know how much time you’ll have, so it’s important to try to enjoy your life while you’re still living it.
If you’re unsure at all about your savings, whether you fear you’re saving too little or even too much, consider talking to a Certified Financial Planner™ or other financial advisor.
Related: Is Your Retirement on Track? Here Are the Average 401(k) Balances By Age
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Related: 12 Best Long-Term Stocks to Buy and Hold Forever
As even novice investors probably know, funds—whether they’re mutual funds or exchange-traded funds (ETFs)—are the simplest and easiest ways to invest in the stock market. But the best long-term stocks also offer many investors a way to stay “invested” intellectually—by following companies they believe in. They also provide investors with the potential for outperformance.
So if you’re looking for a starting point for your own portfolio, look no further. Check out our list of the best long-term stocks for buy-and-hold investors.
Related: 9 Best Monthly Dividend Stocks for Frequent, Regular Income
The vast majority of American dividend stocks pay regular, reliable payouts—and they do so at a more frequent clip (quarterly) than dividend stocks in most other countries (typically every six months or year).
Still, if you’ve ever thought to yourself, “it’d sure be nice to collect these dividends more often,” you don’t have to look far. While they’re not terribly common, American exchanges boast dozens of monthly dividend stocks.
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