When working towards your goals, experts recommend focusing on what you can control. Whether you're saving for retirement, to pay for your child's education, or something else, the number one behavior you can control is how much you save every month. In this article, we'll help establish goals, offer suggestions on where to put your money, and share ways to increase your savings.
How Much Money Should I Save?
Every one of us has unique circumstances that dictate how much, or how little, we can save each month. But, the most important thing to do is get started. The act of saving can become a positive money habit when it becomes part of your normal routine.
Here are a few savings goals that you can work towards:
Your First $1,000
A Federal Reserve study found that 40% of households could not cover a $400 emergency without having to borrow money. When you don't have the money set aside, those emergencies end up becoming debt, often with high interest rates.
Opening an emergency fund with the goal of having $1,000 in it will alleviate some of that stress. Many online savings accounts have no fees or minimum balance requirements, so they're easy to set up. Plus, they often have higher interest rates than traditional banks.
Fully-funded Traditional or Roth IRA
With retirement around the corner, it makes sense to focus on fully-funding a Traditional or Roth IRA. In 2021, the maximum contribution is $6,000 for people under 50 and $7,000 for those 50 and older. Traditional IRA contributions can be tax-deductible, which can lower the amount of taxes you pay each year. Roth IRAs aren't deductible now, but all of its earnings are tax-free in retirement.
While maxing out your IRA is a goal, you can start with smaller amounts. You can open a Fidelity retirement account with no money and invest in select index funds with no minimums. FinTech startups like Betterment also allow you to open an IRA with no minimum contribution.
Get 100% Of Your Employer's 401(k) Match
Companies often match a percentage of your 401(k) contributions to encourage you to save for your future. A common match is 50% of your contributions up to 6%, which means that when you contribute 6%, your employer will add another 3% for a total of 9% of your income.
If you aren't taking advantage of their match, it's like throwing away free money. This match is a guaranteed return on your money and will help you reach your retirement goals sooner. You may not be able to start contributing 6% right away, but you can work towards the goal.
Max Out Your Company Retirement Plan
Company retirement plans like a 401(k) allow you to save money pre-tax (Traditional) or post-tax (Roth) for retirement. Maxing out these plans allows more of your money to grow without paying annual taxes on your gains and dividends.
The IRS allows investors to contribute $19,500 per year under the age of 50 and $26,000 per year once you turn 50. Maxing out your company retirement account may not be realistic right now, but you can increase your contributions every year until you reach your goals.
Emergency Fund with 3 to 6 Months of Expenses
Once you have $1,000 in your savings account, the next goal is to build a larger cushion. Most experts suggest having 3 to 6 months of your normal monthly expenses in an emergency fund. This money is there to cover unexpected expenses big and small, protect you in case of job loss or illness, and make it easier to sleep at night with peace of mind. This money can be added to your online savings account or a portion of it can be used to fund a short-term CD for a higher rate of interest.
For most people, achieving these financial goals will not happen overnight. And that is ok. Even if you never reach the upper limits of these goals, you'll be in far better shape by starting and increasing your savings on a regular basis.
Follow this simple formula to determine how much you should save each month to reach your goals.
|Money Goal||Number of Years||Amount Per Year||Divided By 12||Monthly Savings|
Number of Years15
Amount Per Year$12,000
Divided By 1212
Number of Years
Amount Per Year
Divided By 12
The example above assumes that you’re not going to earn anything on your investments for the next 15 years. That won’t happen for the majority of people.
When factoring in an average 8% annual return on your investments, the results are quite different.
|Monthly Savings||Number of Years||Avg Annual Returns||End Goal|
Number of Years15
Avg Annual Returns8%
Number of Years15
Avg Annual Returns8%
With an average return of 8%, you only need to save roughly half of the amount to reach the same $180,000 goal. The power of compounding interest does the rest for you. And, if you are able to invest $1,000 each month for 15 years, you’d have almost $350,000, which is roughly double your original goal.
Using the combined power of time and compound interest, your savings can make tremendous progress towards your goals.
* Your results may vary based on your risk tolerance and investment choices. Past performance does not indicate future returns and it is possible to lose some, or all, of the money that you invest.
Use the 50/30/20 Rule
One of the ways to achieve your savings goals is to implement the 50/30/20 Rule. This is a set of spending guidelines popularized by Senator Elizabeth Warren in her book, "All Your Worth: The Ultimate Lifetime Money Plan." The plan works by taking your after-tax income and dividing it into three buckets – needs, wants, and savings.
- Needs. Can be up to 50% of your take-home pay. This amount covers bills that must be paid, like housing, car payments, groceries, insurance, health care, utilities, and the minimum payments on your debt.
- Wants. These are discretionary expenses, like eating out, entertainment, gadgets, and vacations. You can spend up to 30% of your paycheck here.
- Savings. Investing and savings should be at least 20% of your take-home pay. This includes investing for retirement, building an emergency fund, and saving for mid-range goals, like a child's education, a vacation home, or a new boat.
Here's a simple table to calculate how much you should be putting towards each bucket when using the 50/30/20 Rule.
|Monthly income after tax|
Monthly income after taxNeeds (50%)
Monthly income after taxWants (30%)
Monthly income after taxSavings (20%)
Savings by Age Milestone
It can be hard to tell if you're making progress towards your goals. That's why many people turn to rules of thumb, which suggest milestones that you should hit at various ages.
Fidelity Investments suggests that a person who saves 15% of their annual income starting at age 25 should have 10x their salary saved when they retire at age 67. Here are the milestones you should strive for to reach that goal.
|Age||Multiple of Salary|
Multiple of Salary1x
Multiple of Salary2x
Multiple of Salary3x
Multiple of Salary4x
Multiple of Salary6x
Multiple of Salary7x
Multiple of Salary8x
Multiple of Salary10x
These milestones are averages and do not take into account your goals, how you envision retirement, and other circumstances that are unique to you. Based on your goals, debt, and other sources of income, you may need more or less than these milestones to retire comfortably.
People who are well ahead of these milestones may choose to continue saving aggressively to retire early, spend more in retirement, or leave an inheritance for their heirs. Others may ease off the gas a bit and allow themselves to spend more on friends, family, and experiences now versus later.
7 Ways To Increase My Savings
When you aren't saving as much as you'd like to hit your goals, there are numerous ways to increase your monthly savings rate. These options include spending less, earning more, or adjusting the way you spend your money. You can incorporate one or more of these different strategies to boost your savings rate to get closer to your goals.
Cancel Unused (or Little-Used) Subscriptions
Subscriptions may seem inconsequential individually. But when you add up $5 here and $10 there for all of the services that automatically hit your bank account or credit card, they really add up. While you may use some of these services regularly, you're probably still paying for others that are rarely used. You can review your bank and credit card statements to find and cancel them yourself, or use a service like Trim to do it for you.
Shop Your Insurance, Cell Phones, and Other Bills
Many services like home & auto insurance, cell phones, and cable TV do not reward your loyalty. The bills go up regularly for existing customers, while new customers receive incredible discounts. Once a year, review your services to see if you can save more money.
Start by calling your provider to ask if they have any ways to save on your bill. Then seek out competitors to find out what discounts and promotions they're offering. Once you've found the best deal, switch to that provider or call your existing account and ask them to match the price.
Refinance Your Home
A home is one of the largest purchases most people ever make. The mortgage on that property is also an opportunity to save considerable amounts of money. If you haven't refinanced lately, you could dramatically reduce your payment with a lower interest rate.
Some people take this strategy a step further by refinancing from a 30-year to a 15-year mortgage. While the interest rate goes down, the payment may go up because you're paying off the home over a shorter period of time. This shorter timeframe to pay off the mortgage may coincide with your plans to retire, which would eliminate a major expense that you need to pay each month.
Lower The Interest On Your Debt
If you have other debt, like a credit card, student loans, or an auto loan, it may make sense to lower the interest rate. Credit cards are notorious for high interest rates, so transferring the balance to a 0% APR promotion. A balance transfer can save a lot of money on interest, which allows all of your payments to go towards reducing the balance.
Student loans, auto loans, and other debt can also be refinanced to take advantage of rock-bottom interest rates. Banks and private lenders are excellent sources of cheap money when looking to pay off higher-interest debt.
Start a Side Hustle
Saving more money isn't just about reducing what you spend. Earning more money is often easier and more rewarding than cutting your expenses. Many people have tapped into the gig economy to earn additional money as rideshare drivers, delivery drivers, and freelancing. Others have built new businesses by selling their crafts on Etsy, eBay, and Facebook Marketplace. Think about the skills you have and how you could help others by selling them your services or products.
Get a Cash Back Credit Card
Without changing how much you spend, you can start earning additional money by switching to a cash back credit card. Many of these cards offer a welcome bonus for spending when you open the account, which can go immediately towards your savings goals. Additionally, you'll earn cash back on all of your purchases and some cards offer bigger rewards when spending with certain types of stores. While each individual transaction may be small, the cash back can add up quickly.
Earn Additional Rewards on Your Credit Cards
Whether you keep your existing cards or add a new one to your wallet, you can earn additional rewards through third-party applications. These apps include Dosh (dining), Neighborhood Nosh (dining), Benefit (retailers), Ibotta (groceries), and Bumped (retailers). The best part is that the rewards earned from these apps are in addition to any cash back or rewards that you're already earning from your credit card.