How much should you save each month?

In a nutshell

Saving is an essential part of managing your finances, but if you’re wondering how much you should save every month, the answer is not black and white.

• Saving money is a healthy financial habit, but it can take time to develop.
• Aiming to save a percentage of your income, such as 20%, can help you meet important milestones.
• How much you save ultimately depends on personal factors, such as your income and living expenses, age, goals and other preferences.

What are your saving goals?

First, it’s essential to determine why you are saving. Are you saving for an emergency fund, a down payment on a house, a dream vacation or your retirement? Each of these goals requires a different strategy and, consequently, different monthly savings targets.

That’s why there’s no one-size-fits-all amount you should be saving. In this article, we’ll offer some guidelines to help you narrow down what you’re comfortable saving each month to reach your goals.

Emergency fund

An emergency fund is your safety net and helps guard against unexpected expenses. A common rule of thumb is to save at least three to six months’ worth of living expenses. However, the ideal amount varies based on different factors, like job stability and family size. Someone in a single-income household with children may lean toward the 6-month target, whereas a young professional in a two-income household might focus on the lower end of this range.

Short-term savings

You may want to save money for short-term goals like replacing a laptop or a future car down payment. For these goals, you’ll need to determine when you’d like to have the money you need and break down what you save each month. For example, if you want a new laptop in a year and expect it to cost $1,000, saving about $85 a month is reasonable but saving $150 per month can help you reach that goal faster.

Sinking funds

Sinking funds are similar to short-term savings, but they're more specific and based on planned future expenses. You might have a sinking fund for your child’s future school expenses, household repairs, Christmas gifts or insurance premiums.

Retirement and long-term goals

Many people want the option to step away from work at some point. To determine how much you need to save for retirement, start by estimating your post-retirement expenses. A common benchmark is to save between 10 to 15% of your income, but these percentages can vary based on when you start saving, when you plan to retire and other sources of income. AP Buyline Editor-in-Chief Will Kenton recommends setting up a traditional or Roth IRA in addition to any workplace 401(k) retirement accounts so your savings will grow tax free until you're ready to retire.

50/30/20 rule of thumb

A popular rule of thumb is the 50/30/20 rule. This guideline suggests that 50% of your income should go towards needs (housing, food and healthcare), 30% towards wants (entertainment, dining out and variable expenses) and 20% towards savings and debt repayment.

The 20% savings rule can also include debt payments: Paying down debt can reduce the amount of interest you pay in the future. Also, once you reduce your total debt load, you will have more cash flow to put toward savings and other important areas of your budget.

Related: How to budget money

If you can’t afford to save 20%

Saving 20% of your income is a great goal, but it can be out of reach for many people, especially those starting their savings journey. If you can't afford to save 20% right now, don't be discouraged. Start with what you can, even if it’s just 1% more than what you're saving currently, and adjust your lifestyle or income accordingly.

Here are a few strategies to increase your savings rate:

• Budgeting: Track your expenses from the past 30 days to get a realistic view of what you’re spending and which categories you can reduce even if it’s only temporary.
• Increasing income: Take on a side hustle or look for opportunities for growth in your current role. If you’re considering earning extra money through a side hustle, start by narrowing down some skills you currently have and how you can monetize them.
• Windfalls: Allocate unexpected income like tax refunds or bonuses directly to savings.
• Automate your savings: Set up automatic bank transfers so that a portion of your income is saved before you ever see it. This is a great way to make saving money a habit, even if you can’t set aside 20% just yet.

By incrementally increasing your savings contribution, you can gradually reach the 20% mark, giving your savings a significant boost over time without causing undue financial strain.

Where to put your savings each month

Once you know how much you want to save each month, you’ll need to consider where to keep your savings. High-yield savings accounts, money market accounts, certificates of deposit (CDs) and retirement accounts are all popular options.

High-yield savings accounts

These accounts typically offer higher interest rates than traditional savings accounts. Right now, high-yield savings account interest rates are relatively high. These accounts can make a noticeable difference over time, especially as your balance grows.

Money market accounts

Money market accounts are a type of savings account that usually have higher interest rates, along with some additional features, such as check-writing abilities and a debit card. They often require a higher minimum balance than high-yield savings accounts.

Certificates of deposit (CDs)

CDs are time deposits that have a fixed term and fixed interest rate. They offer a guaranteed return if you keep the funds in the account until the CD matures; the longer the term, the higher the interest rate is, typically.

Retirement accounts: 401(k)s and IRAs

These accounts offer tax-advantaged savings, meaning you'll pay less in taxes both now and in the future. They are particularly important for long-term goals, like retirement, and should be part of your monthly savings plan if retirement is one of your goals.

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The amount you should save each month depends on your situation and goals. While saving money is great, you don’t always have to start with a large amount every month if you are just starting to establish a habit.

Each month, your savings should be a reflection of your financial outlook, with the understanding that your goals and priorities may shift over time. By following these guidelines and remaining diligent, you can move closer to financial security one month at a time.