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How Much Should You Save Every Month?

How much money should you save, as a percentage of income? The 50/30/20 rule says to save 20 percent of your income. But it’s not always so simple.

More than income or investment returns, your personal saving rate is the biggest factor in building financial security. But how much should you save? $50 per month? 50 percent of your paycheck? Nothing until you’re out of debt or can start earning more money?

How much should you save every month?

Many sources recommend saving 20 percent of your income every month.

According to the popular 50/30/20 rule, you should reserve 50 percent of your budget for essentials like rent and food, 30 percent for discretionary spending, and at least 20 percent for savings. (Credit for the 50/30/20 rule goes to Senator Elizabeth Warren, who reportedly used to teach it when she was a bankruptcy professor.)

We agree with the recommendation to save 20 percent of your monthly income. But it’s not always that simple to suggest the right percentage of income for YOU to save.

If, for example, you’re a high earner, you’d be wise to keep your expenses low and save a much larger percentage of your income.

On the other hand, if saving 20 percent of your income seems implausible, or even impossible at the moment, we don’t want you to get frustrated. Saving something is better than nothing.

But if you want a shot at being secure through old age—and having some extra cash for things you want—the numbers suggest that 20 percent is the number you’ll want to reach or exceed.

Where should you save?

Opening an online savings account is a great way to start saving. You’ll find some of the best rates online (vs. brick and mortar) and accessing your funds can be done from anywhere in the world. Our favorite online bank is CIT, which has launched a Savings Builder Account with an APY of 2.45%.

In order to qualify for the 2.45% APY, you must either make a deposit of $100 per month (initial deposit to open is $100 as well) or have an ongoing daily balance of $25,000 or more. CIT is trying to promote savings health, which is why to receive the very high APY, you must be willing to commit to saving money every month.

Ready to start saving? Compare today’s top saving account rates and open one today!

Why 20 percent?

According to our analysis, assuming you’re in your 20s or 30s and can earn an average investment return of five percent a year, you’ll need to save about 20 percent of your income to have a shot at achieving financial independence before you’re too old to enjoy it.

Here’s the thing: If you want to work like a dog every day until you die, maybe you don’t need to save all that much. Sure, you’ll still want an occasional vacation and something in an emergency fund in case your car coughs up a radiator.

Beyond that, however, we save so that one day we no longer have to work for the money. For most of us, that day won’t come for many decades, but there are regular working people who reach it as young as 40 or even 35.

What are you saving for?

True financial independence means that you can sustain your chosen lifestyle entirely from your investments’ interest and dividends.

How much money do you need to save to do that?

Good question. The simple answer: It all depends. It depends on whether you’re willing to live at the poverty line, need two homes and a sailboat, or fall somewhere in between. It also depends on how well your investments perform. If you can earn an average annual return of seven percent on your money, you can stop working with a lot less than if you only earn three percent.

For simplicity’s sake, we’ll use the common “four percent rule,” which states that, theoretically, you could withdraw four percent of your principal balance every year and live on this indefinitely. That means that you’ll need to save 25 times your annual expenses to become financially independent. (If the math doesn’t shake out for you, remember 25 x 4 is 100, and 100 percent = your total balance.)

There are problems with the four percent rule, of course. For one, there are no risk-free investments that yield anywhere close to four percent today. Sudden inflation could also become a problem. To account for this, and for simplicity’s sake, we’ll base how much you need to save based on your gross (before tax) income not your expenses.

In our example, we assume that you want to save 25 times your annual income, rather than your annual expenses. By default, you’ll actually be saving more than you need (because once you’re financially independent you could stop saving). But when discussing your source of income for the rest of your life, it’s best to be conservative.

How long will it take?

The chart below shows how long it will take you to amass 25 times your income based upon the percentage of your income you save. (We assume a five percent average annual return to account for a more aggressive asset allocation while you’re saving.)

How Much Should You Be Saving?

Percentage of Income SavedTime Required To Save 25x Annual Income
1 percent100 years
2 percent86 years
5 percent67 years
10 percent54 years
15 percent46 years
20 percent41 years
25 percent37 years
50 percent26 years
75 percent21 years
90 percent19 years

As you can see, by saving 20 percent of your income you’ll hit 25 times your annual income in just over 40 years. That means a 30-year-old who starts saving today (assuming no prior savings) will hit this target by 71. If you save less than 20 percent, it will simply take too long for your money to grow to a point where it will allow you to live off just interest.

It’s not that scary, we promise!

Remember that you only need 25 times your annual expenses, not your income, to become financially independent. The lower you keep your expenses, the sooner you’ll achieve your personal savings goal. Also, our savings chart doesn’t take taxes into account.

Tax-advantaged accounts can help

For simplicity, our chart looks at before-tax money going in, assuming that you’ll pay taxes on the money coming out. But tax-sheltered retirement accounts like 401(k)s and IRAs change that equation for the better.

If you take advantage of these accounts, you can get away with saving 20 percent of your net, or after tax, income.

If you qualify for a Roth IRA, use it! Money you contribute to a Roth IRA now comes back to you tax-free when you’re older, so the more you save in a Roth, the less you’ll need to save in total because you won’t have to pay taxes on the Roth withdrawals in retirement.

Contributions to a 401(k) will also help ease the pain of reaching a 20 percent savings rate, according to a TIAA-CREF blog focused on millennials.

TIAA-CREF assumes you can take advantage of at least a 5 percent match from your employer when you put money into a 401(k). This means you’ll really only need to save 15 percent of your paycheck.

Plus, if you are putting money into a 401(k), this money will be deducted from your paycheck before taxes which means that each dollar you deduct will save you some after-tax cash.

Getting to 20 percent—an example

Let’s say you make $1,200 every two weeks. After taxes, it’s $1,000. Your savings goal should be 20 percent of net (after-tax) income, or $200 from every paycheck.

If you make a pretax contribution to a 401(k) of five percent of your paycheck and it’s matched by your employer, that means you put aside $60 from your check before taxes (and your employer kicks in another $60). That’s $120 into your retirement account every month, and your after-tax paycheck is only reduced to $969.

You still owe yourself $80. You could put half into a Roth IRA for additional retirement savings and the other half to build up an emergency fund. What you do with it doesn’t matter as much as the fact that you saved it at all.

This means, after all that saving, your take-home income is still $889 every two weeks, which is only about 11 percent less than your previous paycheck of $1,000. By taking advantage of your employer match and pre-tax deductions, you managed to almost double your savings rate. Talk about bang for your buck!

Between pretax savings and employer matching, saving 20 percent of your paycheck gets a bit easier.

What if I just can’t save that much?

Don’t stress. Saving something is better than nothing.

I can already hear the shouts from the comments: “How ridiculous! I spend almost everything I earn, and on rent, food, and transport! This website is out of touch with its audience!”

Okay, okay. If the 20 percent scenario I just sketched out doesn’t fit your situation (which is going to be unique to you), then please don’t think that I’m saying you’re a failure or a chump. Like I said, we believe everyone should aim for 20 percent, not that everyone should hit that target on their first try.

Start small. Start with 1 percent. When that doesn’t sting so bad, go up to two, or even three. Maybe you hit 5 percent, and that feels pretty good. Maybe you take a crazy leap for 10 percent, and that leaves you stressed and strapped, so you scale back. It’s a process, a literal give and take.

Through it all, keep that 20 percent goal in mind. It’ll keep you from getting complacent. Whenever you get a raise, raise your saving rate! You were doing fine without that money before, and you shouldn’t miss it if you never get used to having it.

Finally, if you’re in debt, you might already be saving more than you think. That’s because paying down debt is essentially saving in reverse.

Think of it this way: One day, you’re debt-free. But you’ve been making big monthly payments to your debts for years. If you suddenly begin to save that money, what would your saving rate be?

Also, try investing

If you can’t save a good chunk of your paycheck every month, investing once (for right now) can help you start saving over the long run.

To get your started, our favorite investing platform is Betterment.

Betterment claims they’re the “simplest, smartest way to invest,” and we agree that they are. With Betterment your money will be automatically invested in index funds. But first, Betterment will ask you a series of questions to help determine your goals and risk tolerance.

You’re probably wondering: How much do I have to pay for all this? Actually, not as much as you might think. Betterment’s fee is simple—0.25 percent of your total portfolio. Compared to traditional brokerage firms, this is a whole lot less.

To get a better understanding of all that Betterment has to offer, here’s our full review.

I hit 20 percent—what’s next?

Keep going! As long as you’re not depriving yourself today, it’s difficult to save “too much”.

Take the same advice we gave to those who are struggling to hit 20 percent: Test your limits, and try to increase them. Building up strength (either physical or financial) takes discipline and consistency, as well as a willingness to listen to your body (or your bank account) when it tells you your current regimen is just too intense.

But saving more is definitely a good idea. Retirement experts say that the traditional recommendation of 15 percent of income is honestly too low to guarantee a comfortable retirement, and that 25 or 30 percent is a safer bet.

Also, keep in mind that if your goal is to retire early or someday leave a well-paying but high-stress job, your savings rate will likely need to be 50 percent or more. This may seem impossible, but it might give you pause when making major financial decisions like deciding how much house you can afford or what kind of car to buy.

The most important thing is to start saving. How much will vary from person to person, as well as from year to year. The best savings philosophy, in keeping with our sports metaphors, comes from Nike: Just do it.

 

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About Lou Carlozo

Based in Chicago, Lou Carlozo is a personal finance contributor for Reuters Money, a columnist with DealNews.com, and a former managing editor at AOL's WalletPop.com. Contact him with story ideas for Money Under 36 at [email protected], or follow him via LinkedIn and Twitter (@LouCarlozo63).

Comments

We invite readers to respond with questions or comments. Comments may be held for moderation and will be published according to our comment policy. Comments are the opinions of their authors; they do not represent the views or opinions of Money Under 36.

  1. Carlin says:

    I agree with the comment from Christine…. saving and spending vary so much. But the most important thing I’ve found is that paying off debt is the key to financial health. When I had an income of $75,000 annually but a car payment for myself, a car payment for my son, higher rent payments when I moved from DFW to NJ, saving was more difficult. Getting out of debt – eliminating the car payments – was essential to increasing my savings. You can’t have it all in life – especially if you want to save.

  2. Sarah says:

    So I calculated how much pre-taxed is going into my 401 k through my job. Per month (with employer matching) I’m at 27% per month. So I’m above the 20% mark, but this is all going to my 401k. My question is, the “20%” suggested to save, is that just for retirement? I should be saving SEPERATE from the 20% for life needs other than retirement? Like a house down payment, a car, ect. What is the suggested saving for other life expenses? Or is the 20% for more that just retirement?

    • Also Sarah says:

      I’ve got the same question! Hoping to have a reply shortly

    • Lauren Barret says:

      The 20 percent figure refers to overall savings, but obviously going higher is always better. However, if you’re already above 20 percent with your 401k, we would definitely suggest putting money away for other needs. How much that would be would depend on what you’d want to do and in what time frame, rather than on a general guideline. So if you want to buy a house in 5 years, and you have a general sense of how much you want to spend, that should guide your saving for a downpayment.

      • Christine says:

        This is why I hate when the 50/30/20 rule is pushed. It’s such financial laziness! Personal finance is 100% personal, and applying this blanket rule is true a cop out. Everyone has different financial situations and to pretend we should all have the same allocations for our budgets is absurd.

        Let’s take two 20 somethings making $50k a year:

        Jane has no debt and is putting 20% into her 401k. Her share of the rent is $600. She has a comfortable budget each month and sets aside a chunk for her home down payment fund. Some months it’s $400, some just $50 and some up to $700.

        Suzy has $15k in student loans, $8k in credit card debt and $3k in medical bills. She lives alone and spends $1200 on rent. She’s putting 4% into her 401k just to get the match.

        Are you really going to tell me that these people should actually be allocating their money the exact same way? Suzy needs to get her sh*t together and shouldn’t feel okay about those 300 cable channels that her 30% fun money allows! And she needs a roommate! And why should Jane be encouraged to spend more on rent when she’s crushing her down payment goal?

        I realize people think the 50/30/20 rule is just a place to start, but it’s so dangerous because it doesn’t make people realize what messes they are. And it doesn’t applaud the people who are working hard towards goals.

        Work hard and save as much as you can. Live your life, yes, but sometimes being an adult means you make sacrifices to hit goals and make smart decisions.

  3. Marc says:

    Your logic is a bit misleading for the “buffer” scenarios provided in the chart. I understand needing a buffer to increase your chances of retirement success, but someone using your chart saving 50% of their income and living the same lifestyle after retirement has TWICE what they need. Isn’t this a bit overkill, considering we’re excluding SS and pensions, if any? On the flip side, someone saving 10% of their income has much less room for error. Why not use a lower SWR, like 33x’s annual expenses? This avoids this type of issue altogether.

  4. Michael @ So You Think You Can Save says:

    Saving a little is just like spending a little, if you do it enough the little numbers can add up to bigger numbers. Just the other day, my 6 year old son was talking about something he wanted to buy and when I reminded him how much it cost, he said “But it’s not that much money” Which is true, it wasn’t. But when I told him how much that would be if spent every week for an entire year, his jaw basically dropped.

    The point being, I think many people think that saving $5 here or there just isn’t worth the trouble, when in reality, it is!

  5. freebird says:

    I’d agree that 20% of pre-tax income is a good target for regular savings. It may be uncommon, but I don’t think the median retirement living standard that is coming over the next couple of decades is something most would find adequate.

    If you can save more by all means do it, the extra cushion will give you options and peace of mind in middle age. I’m one of those who reached my goal of 33x my annual living expenses when I turned 35 years old. I got there mostly through a very high savings rate, starting at 40% ramping up to 60% with my raises. The roaring 1990s bull market helped too. I decided to stay working to fund a more plush retirement.

    I have a good job and a good income right now, but it’s an area where business is unstable so layoffs can happen any time. Just as you under-30s have a hard time getting hired, we over-50s have an easy time getting fired! Based on my age and income, replacing my job could take a year or more, so having the ability to retire any time takes all my financial worries away. Friends and relatives my age in my line of work who haven’t saved much feel stress from all the uncertainty. I wonder whether this contributes to middle-age crisis?

    I guess my message is that a high savings rate is worthwhile even if you don’t plan to ever retire. Unexpected things can happen, both bad and good, where having the extra money will allow you to choose your response.

    • Young Saver says:

      I am in my late 20s and I am still struggling with a high amount of student debt, which makes it difficult to save. I have started saving 20% of my income, but the bulk of that is going toward my house down payment. I keep that and a 3-mont emergency account as a savings account since they are short term (hoping to be able to buy my home in a year or two), so it has a really low interest rate. I just opened a Vanguard account, but after reading this, I realize I need to contribute more to it. Who knows, I may even be able to retire early, or keep working for fun.

      Thanks for sharing!

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