Saving money is essential for emergencies and for financial stability. But how much money should your monthly savings be?
There is no magic amount that applies to everyone. But there are factors that everyone should consider, each unique to your specific situation.
How much money should you save every month?
The two major factors in setting your monthly savings are how much you earn and how much you spend on essential expenses.
Subtract your essential expenses from your monthly income. The result will be the amount to split between nonessential spending and your savings. You can weigh what’s more important to you – but make saving part of your monthly budget. Develop a savings habit, so you’re at least saving something every month.
Why is it important to save?
Saving money affords you freedom and a piece of mind. It contributes to your overall well-being. If you have money set aside in savings, that gives you the flexibility to do what you want and to be prepared for the unexpected. Having money set aside makes life easier.
Saving money also provides financial security, so you don’t have to rely on high-interest credit cards or loans, debts that can hobble you for years to come.
Saving can help you reach major goals. When you set aside money for things outside your monthly budget, your life expands, and you’re able to do more, from buying a car to a down payment on a home.
Saving also taps into the magic of compound interest. Compound interest is the “magical” effect of regularly adding the interest you earn on your savings back into your savings – and in turn, earning more interest based on the resulting higher amount.
When you regularly deposit more money in your savings account – and also add the interest you earn month after month – not only do your savings grow, but the interest you earn also increases every month, based on the increasing amount in your account.
The sooner you start saving, the better results you’ll see from compound interest. It works best over time – and only works on interest-earning savings accounts.
What is the 50/20/30 rule?
Budgeting for saving is essential, and a lot of us turn to the 50/20/30 rule. It divides your post-tax income (the amount of money you actually deposit from your paycheck) between essential expenses, nonessential expenses and savings.
- 50% refers to the percentage of your income dedicated to essential expenses, the things you must have or must do, like groceries, health care, phone and data plans, essential clothing, utilities and mortgage or rent.
- 20% goes towards savings and debt payments.
- 30% is the amount to spend on less essential things, like dining out, streaming subscriptions, extra clothing, vacations or any other discretionary expenses.
This formula is a good starting point and can be adjusted to suit your financial priorities and budget as your situation changes.
How can you start saving more?
Just when you thought you couldn’t, you can. Every little bit counts and can add up to make a huge difference over time. Here’s a few ways to start building your savings every week and every month.
1. Pay off your credit card debt
The faster you pay off your credit card debt, the sooner you’ll have more money to add to your savings, especially all that money you’re spending on interest charges. Try debt pay off method, like the avalanche or snowball method, or try consolidating your debt with a low-interest balance transfer account or personal loan.
2. Set up goals and auto savings
Most savings accounts offer automated deposits. Set yours for your monthly savings budget. Then try doing it on a weekly basis, in smaller increments, so it’s not a big chunk at the end of the month.
If your bank offers targeted savings funds, set up separate funds for different savings goals, from a holiday fund to a vacation fund to smaller funds, like a special weekend or a big night out. It’s always cheaper to use targeted savings than relying on credit cards.
3. Pay for everything with cash
If you pay for everything with cash, it’s easier to keep track of how much you’re spending and stay within your budgets. Once you hit your budget limit, your spending has to stop. If you put things on a credit card, you’re only adding to your monthly bills, plus the additional interest.
