Are you wondering how much of your monthly take-home pay you should save? Unfortunately, there’s no one-size-fits-all answer to this question – it really depends on your savings goals and the financial milestones you want to reach. Read on to explore the reasons why you should save, how to determine an ideal amount to save each paycheck and other factors you should consider while working towards your savings goals.
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Reasons Why You Should Save
Retirement
At some point, you’ll want to hand in your pink slip – on your own terms, of course – and enjoy all that life has to offer. That’s where retirement savings come in, and as a rule of thumb, financial experts recommend that you save 10 to 15 percent of your income annually to help build up your nest egg. But if your employer is generous enough to match your efforts, you don’t have to do it all on your own. To illustrate, if you save 8 percent of your income and your employer agrees to match it by 4 percent, you’ll be at 12 percent for the year.
Emergencies
When life happens, you want to have the funds in place to prevent a financial emergency from becoming a massive issue. So, it’s worth creating an emergency fund that’s at least a month or so of earnings – or whatever you can afford to stash away when you start – can come in handy.
Unforeseen Expenses and Circumstances
Sometimes, what starts off as small financial emergencies or inconveniences leads to lengthy financial hardship. These unforeseen expenses and circumstances, which could be anything from a medical illness or temporary job loss to a significant car issue that warrants a replacement, are bound to happen at some point. But with a hefty cash stash of at least three to nine months of living expenses, you’ll be covered for a bit until you can get back on track.
Plan for Your Short-term and Long-term Goals
Goals written down on a piece of paper are meaningless unless you have a specific plan of action that you’re willing to execute. Consistency when working towards your goals is equally important, but you’ll also need the funds to bring them to fruition. That’s where saving money comes in – if you continue to spend as much as you earn, it’s highly unlikely that you’ll get any closer to achieving the goals you set for yourself unless you’re fortunate enough to receive a financial windfall or unexpected lump sum of cash.
Investments
Once you’ve covered your monthly expenses and put money away for your emergency fund, you can spend what’s left on investments. They can be used to grow your money quicker than you would in a savings account to accomplish short-term goals or to beef up your nest egg.
Financial Security
Living paycheck to paycheck or lying awake at night worrying about money is never any fun. And given the fact that a small financial emergency can take you over the edge, it’s worthwhile to start saving money to provide some sort of financial security if you haven’t already established an emergency fund. Plus, you won’t have to spend every waking hour worrying about how you’ll meet your short-term or long-term financial goals.
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How Much of Your Paycheck Should You Save?
50/30/20 Rule
This rule is often suggested as a way to ensure you’re saving enough of your current income. If you follow this approach, approximately 50 percent should go towards your needs or essential expenses and 30 percent toward your wants – the remaining portion of every paycheck, or 20 percent, is what you’ll bank to build up your savings and allocate towards investment accounts.
50/15/5 Rule
The 50/15/5 takes the same approach to spending on wants and needs – 50 percent goes to essentials, and 30 percent goes to discretionary spending. But the difference lies in how the remaining funds are allocated – 15 percent is used for retirement contributions, and the other 5 percent is placed into a short-term savings account to cover financial emergencies.
Can You Save Too Much?
It depends on your personal savings goals. But ideally, once the balance in your emergency fund is equivalent to 12 months of income, it’s best to focus on maximizing retirement savings to capitalize on the power of compounding interest and make your money work harder for you.
What If You Can’t Save That Much?
If setting aside 20 percent of your earnings for savings and investments seem too far-fetched, don’t fret. Start by saving what you can – even if it’s just a small amount – and adjust your spending plan if possible to increase this number. A slight adjustment in your discretionary spending could be enough to provide the boost you need, and it’s also well worth it, especially if you currently have little or no money saved. Of course, you should also up the amount you’re saving with each paycheck as your earnings increase.
Other Factors You Should Take into Account When Saving
Your Age/Timeline
If you’re nearing retirement age, your savings goals will likely be more aggressive than they would be if you are younger and have more time to build up your savings. But if you have an aggressive goal you want to meet in a limited amount of time, like saving $1,200 in 2 months, you’ll have to consider that as well.
Your Other Income Sources
Do you have other sources of income beyond your main source of earnings? Consider using these income sources to reach your savings goals faster.
Your Current Spending
Are you disciplined with your spending, or do you tend to spend more than you earn? If it’s the latter, revisit your budget to make adjustments that give you wiggle room and make it easier to save money.
Your Savings Goals
How much do you want to save? Ultimately, it’s a personal decision that you have to make to ensure your long-term financial security.
Where to Put Your Savings
Traditional savings accounts and high-yield savings accounts are ideal for parking your short-term savings as they are both easily accessible should you need to pull funds to cover an emergency or make a purchase. The latter allows you to earn more on your money, though, but it usually comes with a higher minimum balance requirement. But if you’re looking for an even greater return on your money or to build your retirement savings, consider investments like stocks, bonds or mutual funds. And if your employer offers a 401(k), be sure to take advantage to grow your retirement account while capitalizing on the tax benefits they offer.
The Amount of Debt You Owe
Is your current debt load manageable? Are you on track to pay the balances off sooner than later, or are you only making the minimum payments and forking over a hefty sum in interest each month? Depending on your responses, it may be best to focus on saving even more to pay down your high-interest credit card debt and free up funds to meet other financial goals.
