The topic of savings is a bit complex because there’s no one-size-fits-all approach. Everyone’s financial situation is different, and some households don’t have discretionary income after expenses. And even if you’re living pay-check-to-check, there’s a handful of ways you can refine your budget and start saving.
Most financial gurus classify savings into the following categories:
- Short and long-term goals
Experts recommend saving between 10 – 15% of your gross income for retirement. This percentage includes employer contributions, so if your company matches 5%, you may only need to save 5% of your salary.
Now, let’s imagine that you’re fifty years old and have just begun saving for retirement. In that case, it’s a good idea to max out your 401(k). The most recent 401(k) maximum contribution is $20,500, not including employer contributions. Those starting to save for retirement later in life may also benefit by maxing out both a traditional and Roth IRA if their budget allows. Individuals aged fifty and over can contribute a maximum of $6,000 to both types of IRAs and an additional $1,000 catch-up amount.
Saving for retirement largely depends on your personal goals and the cost of living in your area. Some people may desire to retire at a younger age and therefore save more aggressively.
You should save at least three to six months’ worth of expenses to put away in an emergency fund. Most people will err on the side of caution and save six months. An emergency fund is a financial safety net that keeps you afloat if you lose your job or encounter significant expenses.
To calculate an emergency fund, add up the following monthly expenses and multiply the sum by a number between three to six (depending on your comfort level):
- Mortgage payment or rent
- Debt repayments
- Other critical expenses
It’s a smart idea to reevaluate your emergency fund periodically. If your expenses increase, you’ll want to stow away more cash in case of an unexpected life event.
Short and Long-Term Goals
The next savings category – short and long-term goals – is generally one of the most fluid. These goals can range from traveling to Europe or buying a home. For some, these are “needs.”
For example, someone saving to upgrade from a two-bedroom bungalow to a four-bedroom house for a growing family. Therefore, you may need to prioritize these goals in the short term and contribute less, to say, your 401(k).
You should save for leisure (i.e., installing a pool or buying a grand piano) after you have a fully-funded emergency account and a retirement plan. The amount you save each month boils down to any discretionary income after 401(k) and IRA contributions. There’s no set-in-stone percentage – it can vary greatly depending on your budget.
How to Save More Money Each Month
The average American family has $40,000 in accessible savings. However, those under 35 only have $9,600 compared to the 75 or older age group’s savings of $51,400. With increasing rates of inflation, saving money has become challenging for the everyday household.
Here’s how you can get ahead and save more money each month:
Create a Budget
Making a budget is vital to managing your income and expenses, and even more important is sticking to your budget. Our software lets you view polished graphs and charts that depict your monthly spending. These visualizations of your monthly expenditures make it easier to see how your actual spending stacks up to your budget.
The standard budget should contain:
- All income from your salary, bonuses, and investments
- Fixed expenses
- Variable expenses
When you create a budget, it’s essential to be mindful of the 50-20-30 rule. Those who follow the 50-20-30 rule spend 50% of their income on necessary items, put 20% into savings, and spend 30% on wants. Note: the 20% savings include investment accounts, such as 401(k) plans.
Track Your Spending
Perhaps the best way to conform to your monthly budget is to track your spending. It’s easy to overspend, primarily if you use both debit and credit cards. Our platform sends you a notification once you reach a spending threshold, making it so much easier to stay within budget. You can also view key spending insights that empower you to make thoughtful changes to your budget in the future.
Increase Your Income
Finding ways to increase your income enables you to meet or succeed in your savings goals. There are various ways to boost your income – finding a higher-paying job, starting a side hustle, or diversifying your investments.
Pay Down High-Interest Debt
Paying down high-interest debt is an excellent long-term strategy that allows you to save more in the future. You’ll pay less interest in the long run, making it easier to pay off other debts or pad your savings account.
Not sure how to start paying off high-interest debt? Use our debt paydown simulation that helps you identify ways to minimize interest expenses.
There’s no tell-all amount that you should save each month. Everyone’s situation is different, depending on their budget and lifestyle. Most financial experts suggest saving 10 – 15% of your gross income for retirement and having an emergency fund equal to three to six months’ living expenses. If you have discretionary income at the end of the month, you can save more to meet your short and long-term goals. Our tools, such as spending threshold alerts, visualizations of your expenses, and debt paydown simulations, empower you to save more and stick to your budget.