Introduction
Perhaps the only thing more daunting than creating a budget is determining how much money you should be saving each month. But the importance of saving cannot be overstated. Whether you are saving for an emergency fund, a down payment on a house, or for retirement, having a savings goal is essential. But how much should you be saving each month? Here, we explore the answer to this question in a comprehensive guide that takes into account various factors that may influence your savings goals.
The Rule of 50/30/20: A Simple Way to Determine Your Monthly Savings Goals
A simple way to determine monthly savings goals is to follow the 50/30/20 rule. This rule suggests allocating 50% of your income to needs, 30% to wants, and 20% to savings. The key to following this rule is identifying wants vs. needs. Needs are essential expenses, such as rent, groceries, and utilities. Wants are non-essential expenses, such as dining out, shopping, or entertainment. The 20% allocated to savings should go towards emergency funds, retirement, or other financial goals.
For example, let’s say your monthly income is $4,000. By following the 50/30/20 rule, you will spend $2,000 on needs, $1,200 on wants and allocate $800 towards savings each month. By following this rule, you can ensure that you are saving enough each month, while still having enough money to cover your expenses and enjoy life.
From Emergency Funds to Retirement: Why You Should Save More Than You Think
While the 20% allocated to savings according to the Rule of 50/30/20 may seem reasonable, it’s important to understand that this number is just a starting point. Having an emergency fund is essential, and most financial advisors recommend having at least three to six months’ worth of expenses saved up. The general rule of thumb is allocating 10% of your income each month to an emergency fund until you reach this desired amount.
For retirement savings, the earlier you start, the better. Financial advisors recommend dedicating 10-15% of your income to retirement savings. In addition to a 401(k) or an IRA, investment accounts can also help you grow your wealth for retirement.
How Your Income and Expenses Should Impact Your Monthly Saving Goals
Your income will dictate how much you should be saving each month. Financial advisors suggest saving at least 20% of your income, but this amount depends on your income level. For those with higher salaries, it may be possible to save a larger percentage of their income. If you’re just starting, begin with the 50/30/20 method, and try to increase the percentage allocated to savings each year.
Expenses also play a significant role in determining how much you should be saving. Prioritizing expenses is essential when creating your budget. For example, if you’re allocating a significant portion of your income to dining out, you may need to cut back and allocate more to savings.
The Power of Budgeting: Finding Room to Save More Each Month
Creating and sticking to a budget is a critical step in reaching your savings goals. By tracking your expenses, you can identify areas where you can cut back and save a little extra each month. After reviewing your budget, consider redirecting the money saved to your savings goals.
There are several free budgeting apps available that can help you track your expenses and identify areas where you can cut back. Some of the popular apps include Mint, Personal Capital, and YNAB.
The Benefits of Setting Up Automatic Savings Transfers and How to Do It
Automatic savings transfers are an excellent way to reach your goals without thinking about it. By setting up automatic transfers, you can ensure that you’re saving the desired amount each month, and it’s an automatic way to stick to your budget.
Many employers offer automatic payroll deductions for savings accounts, such as a 401(k) or an HSA. If your employer does not offer these options, talk to your bank about setting up automatic transfers from your checking account to your savings account each month.
The True Cost of Waiting: Why You Should Start Saving More Sooner Rather Than Later
Waiting to save for your financial goals can have detrimental effects on your finances. For example, if you’re saving for retirement, waiting ten years to start can mean that you need to save twice as much each month to reach your goal.
The power of compounding interest means that the earlier you start saving, the more time your money has to grow. For example, if you start saving $200 a month at 25 years old, assuming a 5% annual return, you will have $384,000 saved by the time you’re 65. Compare that to starting at 35 years old, where you would need to save $550 per month to have the same amount by the time you’re 65.
Conclusion
When it comes to saving money each month, there are several factors to consider, including income, expenses, and individual financial goals. Following the Rule of 50/30/20 is an excellent starting point, but it’s important to consider factors that apply to your specific situation. Budgeting, automatic savings transfers, and starting early are all steps you can take to reach your financial goals.
If you’re struggling to get started, reach out to a financial advisor or check out some online budgeting tools. Remember, every little bit counts, and by taking action now, you could be setting yourself up for financial success in the future.
