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You understand the importance of saving, but stockpiling cash is often easier said than done. This is especially true if money’s tight and high inflation makes it more challenging to stay afloat.
A recent Bankrate survey revealed only 48% of Americans have at least three months’ worth of expenses stashed away. Over one in five don’t have an emergency fund at all. So if you’re worried you don’t have enough money saved or don’t know how much you should be setting aside, you’re not alone.
Here’s how much you should save and how to increase this figure over time if you aren’t quite there yet.
What percentage of your income should you save each month?
Financial experts generally recommend saving 20% of each paycheck. This figure comes from the popular 50/30/20 budgeting rule, which suggests spending 50% on needs and 30% on wants. You should spend the remaining 20% on your savings and investment accounts.
If you have debt, consider splitting the 20% between savings and those pesky balances.
“If someone has debt, I would consider paying that off and look at it as a form of savings,” says Julian Morris, certified financial planner and founder of Concierge Wealth Management.
The idea is by paying off your debt, you’re saving in interest and creating extra wiggle room in your budget.
Assume your monthly income after taxes is $5,000. If you apply the 50/30/20 budgeting framework, you would put $1,000 towards savings. But if you also have credit card debt, you can split the $1,000 between your emergency fund and credit card bills.
What if I can’t save that much?
It may not be feasible for everyone to save 20% of their income. That’s OK.
“It is not a one-size-fits-all number and may differ for people depending upon phases in life or free cash flow,” says Morris.
What’s most important is saving what you can. You can adjust the savings percentage based on your circumstances and goals. Remember, something is better than nothing.
How to build a personal savings plan: a step-by-step guide
It may seem impossible to implement a personal savings plan, but it’s important to set a goal that you can meet and keep you motivated over time.
There are short-, medium- and long-term goals:
- A short-term financial goal can be achieved in a few months, like creating a one-month emergency fund.
- A medium-term goal may take three months to three years to finish. It could be saving up for a car or a down payment on a new home.
- A long-term financial goal often takes longer than three years to achieve, like starting a business or saving for retirement.
Once you’ve established your financial goals, here’s how to create a personal savings plan.
#1. Figure out your monthly income
Grab a notebook and jot down how much you earn each month after taxes. Include any income from your full-time job, freelancing, side hustles, and investments. You’ll need the sum of these figures to calculate your savings target.
#2. Analyze your expenses
Refer to your budget to determine how much you spend monthly. If you don’t yet have one, now’s the time to develop a spending plan to help you meet your financial goals.
Categorize your expenses as either essential (both fixed and variable) or discretionary. Fixed costs are needs that remain constant each month, while variable expenses fluctuate. Discretionary expenses are wants or non-necessities and are an ideal starting point if you need to cut costs.
#3. Calculate how much you need to save
Apply the 50/30/20 budgeting strategy to your income to determine its viability. If it’s not feasible, look at places you could cut back in your budget and try to develop a reasonable savings percentage.
“I advise my younger clients to save 15% of their income – whether to build up cash reserves and emergency funds, retirement plans, employer stock, or a combination. If closer to retirement and behind, then the savings rule is as much as humanly possible,” says Morris.
#4. Make adjustments as needed
Review your spending plan and savings targets often, especially after events like the birth of a child, job loss, or an unexpected illness.
Regardless of major life events or changes you may encounter, what’s most important is that you save what you can. No amount is too little, and some progress is better than none.
How can you increase your savings?
If you’re serious about reaching your savings goals, consider these strategies to help you get there:
- Automate savings. Ask your employer to deposit a portion of your paycheck into your savings account or set up automatic transfers with your bank.
- Review your budget. Look at each line item in your spending plan and identify expenses you can scale back on or cut to save more money.
- Increase your income. Look for a part-time job, side hustle or request more hours at work to boost your earnings.
- Find a bank that works for you. You may miss out on higher interest if your money is in a traditional savings account over a high-yield savings account.
- Use financial apps. Budgeting and cash back apps can help keep your spending on track and save even more on everyday purchases.
- Pay yourself first. Instead of taking care of all your expenses when you get paid and saving what’s left, pay yourself first to avoid overspending.
Remember, discipline and consistency are crucial to establishing a healthy savings habit. If you can keep your spending on track and commit to your savings goals, you’ll be one step closer to achieving financial freedom.
Where to put your savings
Deciding where to save your hard-earned money depends on your financial goals. Here are some options:
- Traditional savings account: This account is a standard offering at banks and credit unions. The rate of return is relatively low, but you can benefit from having the funds at your disposal when you need them. Most traditional savings accounts come with a limit of six monthly withdrawals or transfers. If you exceed this figure, you could incur a penalty.
- High-yield savings account: This account lets you earn more on your money but typically requires a large minimum balance to earn the maximum APY. Withdrawals are also sometimes limited.
- Money market account: This account combines the features of checking and savings accounts. It gives you limited check-writing capabilities, and you may get a debit card to make a set amount of purchases. It often requires a hefty minimum deposit, and you must carry a sizable balance to earn the highest return on your money.
- Certificate of deposit: This account locks up your money for a set period in exchange for a guaranteed return, typically higher than the APY offered on other savings accounts. If you need to make an early withdrawal, you’ll be penalized.
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