One of the basics of personal finance is setting aside money to save. However, figuring out how much you should be saving each month can be tricky, especially if you don't know where to start.
The amount of money you should save each month varies based on your goals. Here's what you need to know to decide how much to save.
How much should you save per month?
For many people, the 50/30/20 rule is a good way to split monthly income.
This budget rule establishes that you must allocate 50% of your monthly income to basic needs (such as housing, groceries and gas), 30% to necessities and 20% to savings.
Why 20% is a good goal for many people
There are several rules of thumb when it comes to saving, whether for retirement or emergency savings, but the general consensus is to set aside 10% to 20% of your monthly income for savings.
If you can't save 20%, save as much as you can, with the ultimate goal of getting to the point where you can set aside 20% of your pay at home, split between retirement savings and retirement savings.
“While I know everyone likes rules of thumb and easy tips, there is no one percentage that works for everyone,” says Laura Davis, CFP, fee-based financial planner at Cuthbert Financial Guidance. "But it begins."
Where to put your savings each month
When splitting your money between retirement and emergency savings, start with your most immediate needs, says Chad Parks, CEO and founder of Ubiquity Retirement + Savings, a provider of retirement plans for small businesses.
Parks recommends finding out how much you can save each month and then deciding where to go from there. If you haven't saved at least six months of expenses, Parks recommends putting 80% of your savings toward building your emergency fund and putting the rest toward retirement.
Once a certain level of emergency savings has been reached, he proposes to change the percentage to favor retirement.
For example, let's say you earn $3,500 per month and you can set aside 10% of your monthly income for your savings rate: $350. If you're building an emergency fund, you'll set aside $280 for this purpose, and the remaining $70 would go toward retirement.
Depending on your situation, you may want to change these numbers. Suppose the employer equips him for the job, receiving the highest consideration when he contributes 6% of his income.
It might make more sense to meet your significant other by first putting $210 into retirement and then putting the rest, $140, into your emergency savings.
Carefully consider your personal situation and needs and choose the division that suits you. However, the ultimate goal is to increase what you have set aside over time.
If you can't set aside 10-20% of your income right now, start where you can and find ways to grow your savings over time.
Ways to increase your savings
Once you have an idea of where you are and what you can afford, you can start increasing what you set aside each month to save money:
Track your spending: "Track your spending and use an app to help you track your spending," says Parks. “You will be surprised how much you spend that you would otherwise save.”
Automate your savings – You can transfer your retirement savings directly from your payroll, so you never have to see the money in your account. You can also set up automatic checking-to-savings transfers to boost your emergency fund.
Consider an IRA: If it suits you and you qualify, Davis says you can use a Roth IRA to build your retirement savings.
Start small if you have to: Even if you can't put aside 10% of your income each month, it's important to get into the habit. “Small actions make savings possible and they add up over time,” says Davis.
Steadily build your savings: Once you've gotten in the habit of saving, you can steadily build until you reach your goal, says Kevin Mahoney, CFP, founder and CEO of Illumint, a financial planning firm. Also, you need to make sure that the money goes where it will do best.
Think about where you invest your money: "The key to a successful savings strategy is consistent progress," says Mahoney. "Each new year should cause a 1-2% increase in the economy."
Update savings after a major life event: Every time you change jobs, get a raise, or get a bonus, you should add to your savings.
Mahoney recommends that savers put 50% of all "new" money in the form of a bonus or tax refund into savings, either setting it aside for retirement or putting it toward emergency savings, or doing both.
"If a child starting school reduces or eliminates childcare costs, put a percentage of the new available funds into long-term savings," says Mahoney.