Saving consistently and sufficiently is one of the building blocks of a healthy financial life.
After all, most Americans need emergency savings, a robust retirement account and medium-term savings for expenses such as college tuition or a home down payment.
So, how do you know if you’re on track with your savings? If you’re looking for some rules of thumb and a sense of how you measure up against other savers, here’s what to know:
What Percentage of My Income Should I Save Each Month?
Strive to save 20% of your gross income each month, some experts say. But they caution that every financial situation is different and that any amount saved is helpful, even if it’s less.
“If 20% is not feasible, starting with a smaller goal of 5% to 10% may be a great way to build the habit of saving,” says Jamie Ebersole, a certified financial planner in Wellesley Hills, Massachusetts.
Another monthly savings goal is $1,000 per month, says Eric Dostal, a certified financial planner and advisor at Wealthspire Advisors in New York City.
“That allows you to set aside $12,000 per year,” he says. “Of course, this can be scaled up or down depending on someone’s individual situation.”
When it comes to an annual savings goal, “I think the best savers are saving at least 20% of gross income annually,” says Peter Hoglund, certified financial planner and senior vice president at Wealth Enhancement Group in Warren, New Jersey.
The term “gross income” is important because it means you’re saving 20% of your total income, not your take-home pay. So it may actually feel like you’re saving 35% or even 40% of your paycheck, Hoglund says.
If that amount seems steep, don’t despair. There are strategies, such as saving pretax money through a workplace retirement plan, which can make saving 20% of gross income feel less arduous.
Experts note that, even if you can’t reach 20% of gross pay, every little bit of savings counts. If you can squirrel away 10% or 15% in your savings or investment accounts, you’re still making worthwhile progress. “Rather than focusing on abstract goals or rules of thumb, think about what you want to accomplish in life,” Dostal says.
“Something is always better than nothing; more is always better than less,” Ebersole says.
Plus, rules of thumb don’t take into account each individual’s financial situation. You may have a unique money setup, such as an expected inheritance or the desire to work throughout retirement, which can change the calculus on exactly how much you should have in savings.
[READ: How to Save $1 Million.]
How Can I Increase My Savings?
If you’re not meeting your savings goals, consider these strategies for boosting your savings:
— Automate your savings. Making the robots save for you, as Hoglund puts it, is a powerful and relatively painless way to save consistently. Set up automatic transfers from your checking to your savings account, or deposit that money directly from your paycheck into a savings account, and arrange automatic transfers from your paycheck to your retirement accounts.
— Take advantage of raises and bonuses. If you earn a pay raise, automatically deposit a percentage of that raise into a savings account. If the money never hits your checking account, you won’t miss it or let it contribute to lifestyle inflation. For example, say you earn a 2% pay raise every January. “If you can boost your savings by that increase every year, that’s a great way to step your way up to 20%,” Hoglund says. Apply the same strategy to year-end bonuses. Earmark some or all of any holiday payout to meet a financial goal such as funding retirement, college or a home down payment or stocking your emergency fund.
— Review your budget. Just like you should be automating any savings, aim to “de-automate” your spending, Ebersole says. Review monthly and habitual expenses such as streaming subscriptions, regular purchases or housing and transportation costs to identify where you can cut back in order to save more.
Where Should I Keep My Savings?
The best place to stash your savings depends on your goals for the money. A rainy day fund that consists of three to nine months’ worth of expenses should be stored someplace liquid such as a high-yield savings account at a different bank than where your checking account lives. “Pick a totally separate bank, preferably one that doesn’t have a branch where you are,” Dostal says. That way, the money is available on short notice, but not tempting to access unnecessarily.
Money for midterm goals, such as your kid’s college fund or a new-home fund, can be stored in medium-term savings vehicles, such as a 529 account (for education) or a brokerage account with a mix of stocks and bonds (the exact balance will depend on your time horizon).
Your long-term retirement savings will likely reside in your 401(k), IRA or another retirement account. Employer 401(k) accounts are one of the first places to look when socking away money for retirement as they are tax-advantaged, and your employer may match up to a certain percentage of funds invested. Your options may be limited by what your company offers, but you should regularly revisit and rebalance to meet your retirement timeline.
What Are Average Savings by Age Group?
Your individual savings will be determined by your salary, goals and long-term financial plans. But your age can also play a role in how much you have in savings.
If you’re looking for a view of what others have in a savings account by various ages, consider this average savings amount breakdown from Bankrate.com.
|Age||Singles with children||Singles without children||Couples with children||Couples without children|
|75 and older||$17,654.36||$18,219.97||$9,307.19||$21,418.24|
(Source: Bankrate analysis of The 2016 Survey of Consumer Finances from the Federal Reserve. Data adjusted for inflation to 2018 dollars.)
While this is one look at your peers’ saving accounts, it doesn’t determine where you should be with your own savings goals and strategies. Your individual savings plan will depend on your long-term plans, time horizon and preexisting wealth.
When it comes to long-term savings strategies, remember that starting to save early is beneficial to your overall savings success, thanks to compound interest and ample time to recoup losses. “The savings you do earlier in life is so much more valuable than what people in their 50s and 60s do because it has time to grow,” Hoglund says.
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Update 11/19/20: This story was published at an earlier date and has been updated with new information.