You sat down and thought carefully about your financial goals — go you! You now know what you’re working towards and how much you need to save, but it can be hard to see a clear path to the finish line.
Realistically, you can only set aside so much money each month toward savings, and it’s important to balance a comfortable lifestyle with your savings goals. Deciding how much you can save each month is the key to steady progress toward your savings goals.
Erika Taught Me
- The 50/30/20 rule is a great way to help you with your savings goals and puts your budget into three categories: needs, wants, savings, and debt repayment.
- Saving 20% of your monthly income is a good goal, but your situation is unique.
- Increasing your savings may include cutting expenses, paying off debt, or earning more money.
- Keep your savings in a high-yield savings account, money market account, or retirement account.
This popular budgeting rule is one of the best ways to determine how much money you should put aside into savings each month. This budget splits your after-tax income (aka the money you have available to spend or save) into three categories.
You will spend half of your monthly income on essentials like rent or mortgage payments, insurance, utilities, and groceries. These are the things you need to live and that you can’t magically cut from your budget (like you can subscription services).
What’s life without a bit of fun? It would be easy to say you should cut all “wants” from your budget until you pay off your debt or meet your savings goals. However, that isn’t a sustainable way to live or manage your money.
Instead, keeping your wants, like entertainment, travel, and dining out, limited to 30% or less of your spending can help you make room in your budget for your savings goals without depriving yourself.
Saving and debt repayment (20%)
Last but certainly not least, you will put a solid 20% of your income into savings and towards paying down debt. If this seems impossible right now you aren't alone. Start by saving an emergency fund and then begin working on becoming debt-free. Once you are debt-free, it will be much easier to save 20% of your income.
20% is just a rule of thumb
Saving 20% of your income is just a rule of thumb. You may need more or less depending on your specific savings goal.
If you aren't currently saving anything, start with saving 1%. Then, when you are comfortable with that bump it up to 2% — then 5%, and so on. Any debt payments you are making also count towards this goal of 20% so don't discount those.
Once you are debt-free, saving more will become easier.
20% of your income may sound like a lot, but you actually need to save quite a bit over your life. First, you'll want to get a six-month emergency fund. Once you have that, you'll want to start building your retirement savings.
You'll also want to start saving for specific purchases, like car repairs or a down payment.
How to increase your savings
If you want to save more money, you'll have to either spend less, earn more, or both. So first, take a look at your monthly expenses and see where you can cut. Once you've done that, look into making more money.
Cut expenses: If you want to save more, you need to critically examine how you are currently spending your money. Where can you cut unnecessary spending so you can save more?
Pay off debt: Paying off debt is a powerful way to have more money in your budget.
Set up automatic transfers: If you've determined an amount you can save each month, set up automatic transfers so you don't have to think about it. That way you can't accidentally spend the money.
Examine your living expenses: This might be more extreme, but is there anything you can do to lower your basic living expenses? Moving to a smaller place or getting a roommate, for example?
Look into earning more: Can you ask for a raise at work? Take on a side hustle? Or maybe even get a new job with higher pay?
Related: What is inflation?
Where to keep your savings
You'll want to keep your savings in a high-yield savings account, preferably at a different bank than where you keep your checking account. This way your emergency fund is easily accessible, but not too accessible.
If you are saving for a specific goal such as buying a car, you could consider a money market account. These types of savings accounts are like a cross between savings and checking. They pay higher interest rates but allow you to write checks from them. You could pay for your car straight from the money market account without having to transfer the funds to your checking account.
If you are saving for retirement, you'll want to keep your retirement savings in tax-advantaged retirement accounts, such as a 401(k) or IRA. These are investment accounts that will allow you to invest your savings and save money on taxes.
Is $1,000 a month enough to save?
There’s no right or wrong answer for how much money is enough to save each month. How much you can afford to save depends on your unique financial situation. For many people, $1,000 is an impressive amount of money to save monthly. If this is an amount you want to put away, take a hard look at your budget to see where you can cut expenses.
How much does the average person save a month?
According to a 2023 New York Life survey, American adults saved an average of $5,011 in 2022. That breaks down to a little over $417 each month. Remember, this is just an average. You should base your savings goals on what you can realistically save each month.