When you pad your savings account, youâre ensuring your current and future financial security. Not only does saving provide you with a safety net when life unexpectedly sends you tumbling, but it will pave a way to an enjoyable retirement so you wonât have to work forever.
But exactly how much should you be tucking aside each month? Thereâs no hard-and-fast rule that everyone should follow, but there are guidelines and money management tips that you should follow. Ultimately, whatâs important is evaluating your personal savings goals so you can make them a reality.
When calculating how much you need to save per month, the first step is to create a budget if you donât already have one. Without a budget, you wonât have a good idea of how much youâre spending each month and where. If you already have a budget, itâs time to revisit and refine it. Comb through your expenses and see where you can trim the fat (think monthly subscription services that you never use). Take any extra cash and funnel that to your savings goals.
The next step in creating a monthly savings plan is determining your goals. âA proper monthly savings plan will start with forming goals, and will consider different aspects of those goals,â said Dan Stous, a Certified Financial Planner and the director of financial planning and a wealth advisor for Flagstone Financial Management. âWhat are you saving for? Retirement? An emergency fund? A wedding? Unique goals with their own time horizons and different costs will impact a savings plan.â
Your goal should be to have a long-term savings account, a retirement account and an emergency fund (this should be stocked with enough cash to cover three to six months of expenses). From there, you can get as detailed as possible. If you want to save some cash for a new car, create a new savings account for that goal.
One easy way to get started with saving each month is to take the âout of sight, out of mindâ approach. In other words: Automate everything.
âI would recommend automating as much as possible when creating a monthly savings plan,â said Michael Pappis, the CEO and founder of Amity Financial Planning. âFor example, if you are looking to start saving in a Roth IRA retirement account, set up an automated system that transfers a set amount of money from your bank account to your Roth IRA each month. That way, you can pay yourself first â by saving for your financial independence â instead of spending this money on unnecessary things.â
No matter what your approach to saving each month is, whatâs vital is that you start immediately. In the end, saving something â even if itâs as little as $50 a month â is better than saving nothing.
âRecognizing that you have more than you need and then just putting the excess money in a high-yield savings account, for example, is better than spending it,â Stous said. âIt might not be near the amount you should be saving, but again, itâs better than nothing, so donât let indecision and analysis paralysis prevent you from doing something.â
One solid savings technique is the 50/30/20 rule. Hereâs how that breaks down:
Keep in mind that these percentages are based on your take-home pay. Letâs take a look at how the 50/30/20 rule would shake out with monthly savings in mind.
|Yearly Salary||Take-Home Pay*||Annual Savings (20%)||Monthly Savings|
*Take-home pay based on 2019 tax bracket for individual taxpayers.
As you can see, the 50/30/20 rule shines because of its simplicity. âOne of the main benefits of the 50/30/20 rule is that it establishes a clear framework for someone who wants to begin saving and doesnât know how to start,â Pappis said. âIt allows you to establish a bucket system for your spending and savings that is straightforward and easy to follow.â
To make sure youâll live comfortably throughout your golden years, itâs important to start saving as much as possible for your post-work life.
Begin your retirement savings plan by calculating how much youâll spend each year of retirement. To make determining this figure easier, consider using a retirement calculator, which considers health care costs, life expectancy, housing expenses and more. Once you have that figure in mind, you can formulate your nest egg goal.
One rule of thumb for retirement savings is the 25x rule, which says that your goal should be to have saved 25 times your annual retirement expenses in order to live comfortably after you stop working. Break that number down into a monthly plan to keep your savings on track.
Saving money is important, but sometimes itâs easier said than done. If youâre having trouble getting started saving or want to start saving more, here are some tips that may help you out:
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