Am I saving enough? How can I decide how much money to save?
It’s a question I’ve asked myself a lot as I’ve reviewed monthly savings goals. The question, how much should I save each month, has been kind of tricky for me to answer over the years.
Early on in my adult life that was because, well, we simply didn’t have much to save. When my husband was in grad school and we were living off of my measly, entry-level copywriter’s income? There were definitely more months in the red than not.
Even as incomes have grown and we’ve become more financially stable, however, I realized that when it comes to savings — I’m something of a bottomless pit. I could be sitting on top of a literal pile of money and still feel the need to save more.
Other people might have the opposite problem: it’s a struggle just to save anything at all. If changes burns a hole in your pocket, cash in savings can feel like a blowtorch to the side of your bank account. Sooner or later, you burn through it.
6 steps to decide how much money to save each month
For natural savers and spenders alike, deciding how much money to save is crucial. For spenders, it helps them build financial security and buy want they want with cash. For savers, it can keep them from taking their money-hoarding impulses too far.
In either case, setting concrete savings goals can keep you on track and reassure you that you are saving enough. Here are the steps I follow to decide how much money to save each month, or per paycheck, to reach my goals.
1. Choose what you’re saving for
The first piece of information I need to know is what I’m saving for. After all, I’ll never know how much money to save each month to reach a goal if I never decide what that goal actually is.
So I start with identifying the general goal I’m working toward. Here are some common savings goals:
- An emergency fund to cover unexpected or emergency costs
- Retirement savings and other long-term, rainy day funds
- Major upcoming expenses, such as buying a home or replacing an old beater with a new car
- A Fuck-Up Fund or similar buffer in your bank account
- Planned wants and needs for the next few months up to 2 years, such as holiday expenses or a vacation
Choose one or two savings goals and walk through the next steps to figure out how much you should save each month.
2. Get specific about your savings goal
Once I have a general idea of what I want to save for, I will work to find out the exact amount I need to save to accomplish my goal.
Let me share an example. Next year is my 10-year wedding anniversary, and I want to do something special to mark the occasion. I’m not sure exactly what that will be, yet, but I have some ideas, including a weekend getaway or a camping trailer.
I’ve started researching each potential expense to see what it would cost us, including all possible expenses. For a trailer, for example, we’d need to buy that — but also a trailer hitch and other gear to go with. And the cost of a weekend trip will vary wildly depending on where we go, whether we drive or fly, and so on.
Whatever your savings goal, you need to get a firm idea of the total amount of money you’ll need to save to achieve it.
3. Consider general savings rules
If you’re saving for a big purchase, there are plenty of “rules of thumb” you can use as guidelines to decide how much money you need to save. Some common savings rules, for example, include:
- An emergency fund should be 3-6 months’ worth of expenses in an emergency fund
- Retirement account contributions should be equal to 10-15% of pretax income
- A down payment on a home or car should be 20% of the total price
- For short-term savings goals or sinking funds, you should set aside 5% of income
These general rules are, of course, very broad. Not every person can or should save that amount. I certainly didn’t have a 20% down payment when I bought my home, for example.
But checking out the overall advice can help you set a baseline, and from there you can decide what financial advice is worth listening to and what might be realistic for you.
4. Find how much you can afford to save
Ideally, you can save 10% for retirement, for most people that is more than a stretch. So while it can help to investigate general savings guidelines, you need to look at the reality of your finances.
This is where it’s important to be tracking expenses and keeping a budget. Your budget will tell you how much money you have coming in and going out every month — and the difference between the two.
You need to figure out how much money is left after paying for your basic living expenses. This is your discretionary money, funds that you get to decide how to use. Review your spending with a critical eye to see how much of your discretionary money you can save.
If you don’t have much discretionary funds, that’s okay. You can still make saving money a goal. Even $10 per paycheck or $30 a month is a solid start to building a cushion in your bank account and building a savings habit.
5. Run the numbers on your savings goals
Next up, you need to put the numbers you have together and figure out how to make them make sense. There are a few ways you can run the numbers on your savings goals:
- Start with the total amount you need to save, then divide it by the number of months you have to save. Total savings
goal / numberof months to save = how much you need to save each month to reach that goal.
- Start the total amount needed to achieve a savings goal, then divide it by the amount you can save each month. Total savings goal / affordable monthly savings = number of months needed to reach that goal.
- If you don’t have a set total you need to save, start with the amount you can afford to save each month, and then multiply that by the number of months available to save. So monthly savings X number of months to save for = total saved by your deadline.
Running these calculations can be a helpful reality check — no matter what you’re saving for. It can help you see if you’re saving enough each month, if you need a longer timeline for your savings, or if you’re right on target.
Don’t forget to take interest or returns into account! If you’re running calculations on long-term investments like retirement accounts or even a 529 account for college savings, remember to factor in and compound any interest or returns you expect to get each year. This Investor.gov calculator is handy for calculating this.
6. Prioritize your savings goals
It would be amazing to have enough money coming in to cover all savings goals. But the reality is that you probably can only save for one or two goals at a time. That’s especially true if you’ve got some big savings goals or saving money is a skill you’re still working on.
Don’t try to do it all at once. You’ll get further, faster, if you prioritize savings goals and focus first on the ones that matter most.
To prioritize savings goals, I split them up into three categories:
Non-negotiable savings goals are what I make sure happen first, and don’t compromise on. For me, this includes maintaining fully-funded emergency savings and contributing to retirement savings.
Important savings goals are significant but not strictly necessary. For me, this is where I put goals like saving for college or a major purchase, such as a new car or home repair.
Nice-to-have savings goals are focused on paying for non-necessary future fun. My 10-year anniversary purchase falls into this bracket. So do family vacations or new gadgets like a video game console.
Most of our savings come out of my income, which as a freelancer, can fluctuate quite a bit. Since I’ve prioritized my savings goals, I make sure that what I save each month goes first to what matters most. If expenses or incomes change and we end up with extra money, I know what’s next to put those savings to good use.
Consider paying down debt alongside savings money
My last point might seem a little
Paying down debt, after all, increases your net worth just as much as building a savings account balance or contributing to retirement savings. It lowers the “negative” balances that you owe, that offset the “positives” of the cash and other assets you own.
Making extra payments on debt is also crucial to improving financial health, as you can avoid paying hundreds of dollars or more in interest. And with each debt you pay off, you eliminate a monthly payment and free up more cash in your budget.