How Much Should You Save?
Having savings is important for many reasons. First of all, you need to save money if you hope to achieve your financial goals, such as buying a home or car or taking a vacation. You also need to save for the future, such as your retirement or your children’s education. Emergency savings are also critical. You never know what is going to happen in life and having money to help you deal with unexpected costs or a job loss can keep you from getting into debt trouble.
However, while most people know that saving money is important, many people are unsure of how much money to save each month.
How Much Money to Save Each Month
The amount that you should save every month depends somewhat on your situation in life. This means you’ll aim for different amounts depending on your age, your income, where you live, what financial goals you may have, your expenses, and much more. For instance, someone who is 25 years old, earns $30,000 a year, and spends $1500 a month on rent will have a different savings target than a person who is 55, earns $75,000 a year, and has paid off their mortgage.
However, a good rule of thumb is that you should ideally be saving about 20% of your income each month.
Of that amount, about half of it should go towards retirement savings while the other half should be split between saving to reach your financial goals and saving for emergencies.
The actual percentages will depend on your current situation. If you already have a lot put aside for emergencies, for example, you will need to dedicate less to this category while if you don’t have anything in your emergency fund, you may want to increase your efforts here.
Why Emergency Savings are Important
As mentioned, there are many different types of savings. All of these types are important, but saving for emergencies is critical since having savings is one way to potentially avoid serious debt issues in the future. If you lose your job, get injured or sick and cannot work, or if an unexpected expense (such as a major car repair) comes up, having savings can prevent you from needing to take on new debt to make ends meet.
In general, you should aim to have at least three to six months of expenses in your emergency fund. This means you’ll want to be in a position where you could live off of your savings for three to six months if you should lose your job. However, if you are the primary earner in your family, if you work freelance or do contract work, or if you work in a field where it could take you a while to find a new job, you may want to consider saving a larger amount, such as nine months or even 12 months of expenses.
How to Grow your Savings
When you’re faced with the thought of savings six months of expenses in your emergency fund or building a retirement fund of over a million dollars (which is how much many experts suggest people need to be able to retire comfortably), it can seem very daunting. These are large amounts and thinking about saving this much can feel intimidating and sometimes even impossible.
However, the way to achieve these goals is to increase your savings slowly. You’re not going to save a large amount of money overnight, but you could reach your goals over time if you build your savings slowly.
The first step is to look at your spending. How much do you spend each month? Could this amount be reduced? Look where your money is going and see if you can cut some spending. Small amounts add up.
For instance, if you can reduce your spending by $20 a week by cooking at home instead of eating out, that adds up to around $80 a month. If you save another $10 by switching to a cheaper cell phone plan, $5 by walking to the store instead of driving, and another $5 by cutting out some impulse purchases at the grocery store, you’ll have an additional $100 a month that you can put into your savings account.
Tracking your spending is an important part of sticking to a budget. Use an app, a spreadsheet, or a pen and paper to record every purchase you make. This will help you see where your money is going and make cuts as necessary.