Are you getting more serious about your savings plan? If so, that’s smart.
But how much should you save and should it change throughout your life? Here’s what the financial experts say.
What Percentage of Your Income Should You Save Each Month?
When it comes to how much you should save per month, you can follow general guidelines or figure out a rate based on your specific savings goals. Here are some methods you can follow:
The 50/30/20 Rule
One of the popular budgeting guidelines is the 50/30/20 rule. It says that 50% of your earnings should go to necessities, 30% to discretionary items and 20% to savings. For example, if you earn $8,000 per month, you should save $1,600 of it.
There’s no guarantee, however, that a general guideline is going to work for you.
“Each person’s savings rate should reflect their finances and financial goals. While there are general rules and percentages, average savings rates are unlikely to fit you as an individual,” Jay Zigmont, Ph.D., MBA, certified financial planner and founder of the website Childfree Wealth, says.
This general guideline doesn’t factor in your age, current income, desired income in retirement, personal financial goals or accumulated assets. So, for some, saving 20% may be too much, while for others, it may not be enough.
[SEE: 10 Best Budget Apps.]
A Personalized Savings Approach
If you’d like to take a more personalized approach, you’ll need a comprehensive understanding of where you are now and where you want to go. Brian Walsh, CFP and senior manager of financial planning at SoFi, recommends a six-step plan.
1. Understand what you own, owe and spend: Take note of all your assets (checkings and savings accounts, investment accounts, retirement plans, real estate, etc.), your liabilities (student loans, credit cards, personal loans, mortgages, etc.) and your cash inflows.
2. Identify your goals, concerns and preferences: Set short-, mid- and long-term savings goals and prioritize them. A short-term goal might be creating an emergency fund, a mid-term goal might be buying a home and a long-term goal might be saving for retirement.
3. Plot your course: Make a plan to get from point A to point B. Then, figure out if you’re in a good, OK or bad spot regarding each goal.
4. Identify your next best action: Calculate the best use of your next dollar. Maybe you need to pay an extra $200 per month to repay your credit card in the desired timeline, save an extra $300 per month to retire how you want or save an extra $150 a month to build your emergency fund.
5. Focus on that action for the next 30/60/90 days: Once you understand your next best action, focus on that for the next 30/60/90 days.
6. Rinse and repeat: Review your plan, make adjustments as needed and set another best action for 30/60/90 days.
By breaking down your savings plan according to Walsh’s method, the amount you’ll save for each goal and overall will be customized — and it will probably change over time. While this will take a bit more work than defaulting to saving 20% of your income, it provides a clearer path to specific savings targets.
What Savings Goals Should You Prioritize?
If you can’t save as much as you’d like, prioritize the following:
— Emergency fund: Putting together a three- to six-month emergency fund is essential so you have a financial cushion if anything goes wrong. It can help to ease financial stress and prevent taking on high-interest debt in emergencies. “Emergency savings goals might have a little more urgency in the short term,” Eric Blattner, CFP, certified financial advisor, certified investment management specialist and partner/wealth advisor at Divvi Wealth Management, says.
— Maximize employer retirement matching: “If you have retirement savings and your employer matches a certain percentage of your salary deferral contributions, start by aiming to save at least that amount,” Blattner says.
— High-interest debt: Don’t overlook high-interest debt. “Remember that paying down debt is also saving money. If you have credit card debt, focus on paying that down. Credit card interest rates are on the rise and you won’t be able to save enough to make up for 20%+ interest,” Zigmont says.
[READ: Be Ready for the Unexpected With an Emergency Fund.]
How Can You Increase Your Savings?
If you’re currently unable to save as much as you’d like, here are a few ideas that can help:
— Automate savings transfers: “Relying on willpower or discipline to improve your finances typically doesn’t work. Instead, develop a system that automates your finances so you can make a good decision once and reap the rewards in the future,” Walsh says. For example, you can set up an automatic transfer so a portion of each paycheck is automatically sent to your savings. Walsh also suggests setting up automatic future increases to your 401(k) and joining “roundup programs,” in which your bank sends leftover change from checking account transactions to your savings account.
— Reduce expenses: Another way to boost your savings is to audit your monthly expenses. Take a close look at what you spend each month and see if there’s anything you can cut out or reduce. For example, could you reduce your housing costs, grocery bills, entertainment spending, subscriptions or car payment?
— Increase income: You can save more if you’re earning more. While this is easier said than done, there are a few potential ways to increase your monthly income. You could talk with your employer about a raise or advancement opportunities that could result in higher pay. Alternatively, you could look into taking on a side hustle.
Where Should You Keep Your Savings?
The best place to keep your savings depends on how long it’s going to remain in the account.
“If you will or could use the money in the next few years, your money should be in a savings account that earns a competitive APY. Short-term money should not be invested, but that doesn’t mean you shouldn’t earn as much as possible,” Walsh says.
[See: Best High-Yield Savings Accounts]
But what about the money you’re saving for longer-term goals like retirement?
“If you won’t use the money for a decade or more, your money should be invested in a low-cost diversified manner. Historically, equities have provided the highest long-term returns. With a long-term time horizon, the occasional volatility of the market should not be an issue,” Walsh says.
What Are Average Savings by Age Group?
While there’s no data available on the average amount different age groups keep in their savings accounts, the Federal Reserve’s Survey of Consumer Finances does give some insight.
It reports the balances of all transaction accounts, including savings, checking, money market and call and prepaid debit card accounts. Below, you’ll find the average balance Americans held in all transaction accounts by age, according to the most recent report.
All Transaction Accounts
| Age | Less than 35 | 35-44 | 45-54 | 55-64 | 65-74 | 75 or older |
| Transaction account balance | $11,250 | $27,910 | $48,200 | $57,670 | $60,410 | $55,300 |
Data source: Federal Reserve, Transaction account by age of reference person
Americans under 35 had an average of $11,250 across all of their transaction accounts. As age increases, so does the average balance amount until it peaks for 65- to 74-year-olds. With most Americans retiring around 65, it’s not surprising to see the average balance growth slow at that age and decline afterward.
Note that the above numbers don’t reflect funds in retirement accounts, CDs, bonds, stocks and other financial accounts. Below you can see the average American’s retirement account balance by age. Again, it grows until the age bracket that starts at 65, then declines.
Retirement Accounts
| Date | Less than 35 | 35-44 | 45-54 | 55-64 | 65-74 | 75 or older |
| Retirement average account balance | $30,170 | $131,950 | $254,720 | $408,420 | $426,070 | $357,920 |
Data source: Federal Reserve, Retirement accounts by age of reference person
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How Much You Should Save by Month and by Age originally appeared on usnews.com
Update 03/22/23: This story was published at an earlier date and has been updated with new information.
