How Much Money Should I Be Saving?

The amount of money you save each month should directly relate to your individual savings goals.

Whether you’re saving for retirement or a down payment on a house, you should always take a goals-based approach when considering how much money to save.

In general, experts will recommend saving around 20% of your gross income each month.

However, the specifics of your unique financial situation may mean you need to save more or less each month or even skip saving entirely and instead pay down your debt first.

In this article, we’ll outline the basics of how much money you should be saving, as well as a few scenarios where you may want to change your saving patterns.

How to start saving money

At a high level, saving money is a very simple math problem.

As long as you have more money coming in than going out, you’ll naturally accumulate (save) money over time.

There are many reasons to save money. From planning for retirement to saving for a down payment on a new home, having a safety net of funds you can rely on is a great way to get a jump start on your financial goals.

However, to successfully save money over time, you’ll need to put together both a budget and a plan for how and where you’ll save your money.

Cut your expenses by making and following a budget

The first and easiest way to tip the needle in your favor and start saving is to create a budget that allocates a set amount of money each month into a savings or retirement account.

When creating a budget, many financial advisors will recommend using the 50/30/20 rule to organize your money into three general buckets:

• Needs and Required Expenses—You should spend 50% of your post-tax income on needs and other necessary expenses such as housing, groceries and transportation.
• Wants and Entertainment—You should spend 30% of your income on wants and other expenses such as entertainment, eating out and other everyday expenses.
• Savings and Retirement—Finally, you should put at least 20% of your income into a savings account, retirement account or another similar financial goal.

With this framework in mind, a simple answer to the question of “how much should I be saving” is roughly 20% of your monthly post-tax income, as this is the number commonly used in most budgets.

If your expenses in the other two categories are too high for you to comfortably save 20% of your income, you should consider cutting non-essentials such as eating out until you find a way to better account for savings in your budget. It’s all about balancing your “wants” and “needs.”

Find a way to increase your income

Cutting your expenses is almost always easier than finding ways to increase your income.

However, if you need a little more wiggle room in your budget, it may be worthwhile to look for alternative sources of income to pad out your accounts.

In the event your expenses are still higher than your income after you factor in your savings goals, consider looking into side hustles or part-time jobs as an additional source of income.

You could also start looking for a different, higher-paying job or negotiate with your current employer for a raise.

No matter which course you choose, your final goal should always be making sure your income is higher than your expenses, as this is the only real way for you to consistently and reliably build your savings over time.

Research different options for where to save your money

After you’ve implemented a budget that reserves at least a small portion of your income for savings, you should start looking for different ways to make your money work for you.

Start with an emergency fund

As you start saving your money, your first and highest priority should be to build out an emergency fund that can cover roughly three to six months’ worth of expenses.

An emergency fund is an amount of money you set aside to soften the impact that unexpected emergencies can have on your finances.

For example, imagine for a moment that you don’t have an emergency fund and the water heater in your house goes out. The average water heater costs around $500 to $2,000, not including installation, so how do you pay for a replacement?

Without an emergency fund in place, you only have a few limited options for the expense.

For instance, you could divert funds in your budget toward the water heater, which may or may not cover the entire cost.

You could also choose to purchase the item on a credit account or use a loan from your bank. However, this would result in interest payments over time, costing you more money overall.

Saving up for an emergency fund can save you more money over time by reducing the burden that an unexpected expense could have on your finances.

For this reason, it’s critical that you start your savings journey by building out an emergency fund that’s equal to around three to six months of your expenses as a buffer between you and any future financial problems.

Explore how paying down debt can save you money

After you save up an emergency fund, you’ll have a few broad options for where you should put your savings next.

However, the first question you should look into is whether it’s more advantageous to pay down your debt or to invest the funds elsewhere.

While this question strays a little into the pros and cons of different financial planning strategies, the first decision is actually very relevant to this discussion.

Specifically, if you have any high-interest debt—generally referring to any debt with an interest rate greater than around 10%—it’s often more advantageous to pay down that debt first before you investigate other savings vehicles such as CDs or retirement accounts.

As a general rule, you should think of the interest accrued on your debts as the inverse of any gains you may receive on an investment or other savings account.

If the interest on your debt is significantly higher than your potential for safe growth in a different account, then it’s almost always better to pay down the debt first to receive the guarantee of no more interest payments over risking the money elsewhere.

After all, it’s almost impossible to beat a guaranteed rate of return of more than 10%, no matter where you save your money.

Open a tax-advantaged account and start saving for retirement

Once you finish paying off any pressing debt you have outstanding, you should look at a variety of different account types to find one that best meets your financial goals.

Often, this means saving your money in an account with the potential to grow over time.

As a few examples of accounts that meet these criteria:

• High-Yield Savings Accounts—A high-yield savings account is a great option for keeping your funds safe while still allowing them to grow. Savings accounts generally can’t lose value (except through inflation), making them one of the safest options for saving money over time. However, they also typically generate less interest than other account types, meaning the value of your funds may decay over time due to inflation.
• Certificates of Deposit (CDs)—A CD is an alternative to a savings account where your money will generate a higher guaranteed interest rate over time but must remain in the account for a set period (ranging from a few months to several years).
• Money Market Account—A money market fund is a mutual fund that invests in low-risk, short-term debt and cash equivalents such as government bonds and CDs. While these funds generally don’t grow in value directly, they can generate income through dividends that you can reinvest in the accounts over time, leading to safe and stable growth. Many banks offer specific money market accounts that invest your money into money market funds.
• Individual Retirement Accounts (IRAs)—An IRA is a tax-advantaged retirement account where your money can grow over time on a tax-free or tax-deferred basis. IRAs are an excellent way to save for retirement or other long-term goals because of the effect of compounding interest.
• Employer-Sponsored Retirement Accounts—As with IRAs, some employers offer tax-advantaged investment accounts such as 401(k)s that you can use to save for retirement. These accounts have higher contribution limits than IRAs—and often include employer matching—making them an excellent way to invest for your retirement.
• Health Savings Accounts (HSAs)—An HSA is a tax-advantaged savings account where you can save funds for the purpose of spending them on health-related expenses later (such as doctor visits or medical bills)—or for anything after you turn 65. HSA funds can also be invested similar to a 401(k), making them an excellent choice for both short and long-term saving. As with IRAs and employer-sponsored retirement accounts, HSAs have an annual contribution limit and place restrictions on when you can take the money out without incurring taxes or penalties.

Each of these accounts has a different risk profile and potential for growth over time.

Only you can ultimately decide where you should put your money. Do some research and choose the account type that fits your risk profile while also helping you toward your savings goals.

Go over your options at your local bank

At a very high level, saving money means making sure your expenses are always lower than your income.

Whether you choose to lower your expenses or pursue alternative sources of income, this simple fact will largely drive your ability to save.

When you create your budget, it’s recommended that you try to save around 20% of your post-tax income per month toward your savings goals.

In most cases, this means building out an emergency fund, paying down any high-interest debt and then putting your money into one of a few different investing and savings account options.

If you need any help choosing from the different account types available, take a moment to discuss your options with one of our financial advisors at 800-236-8866 or stop in at any of our Associated Bank locations. You can also schedule an appointment online.

Saving for your future doesn’t have to be difficult. Once you have a plan in place for where you put your finances, all you need to do is execute your strategy and monitor its progress over time.

We’re here to help you every step of the way as you work toward your savings goals.