How Much Money Should I Save?

FT Contributor  | 

Putting away money each month or each paycheck is a no-brainer. However, 39% of people don’t have enough cash in savings to cover a small emergency. Creating savings not only helps you in an emergency, but also helps you reach your financial goals, including:

  • A retirement fund, like an IRA or a 401(k);  
  • A college fund for your children; 
  • A household budget;
  • A paid-off debt;
  • A nice vacation.

While there are many savings goals and strategies you can utilize, it’s important to note that each savings plan is unique based on your goals. No matter your goal, you should be saving — but your goal can also help you decide how much money to tuck away each month.

Average Savings by Age

Many people like to measure the amount of savings they have by using age milestones. According to recent reports from CNBC, the average household savings and savings goals are as follows:

Age Average Household Savings Savings Goal
25 to 34 $1,350 to $4,727 25% to 50% of your salary
35 to 44 $2,422 to $10,399 2 times your salary
45 to 54 $4,163 to $15,589 4 times your annual salary
55 to 64 $6,786 to $17,587 7 times your annual salary
65 to 74 $6,652 to $15,297 10 times your annual salary
75 and older $6,909 to $16,025 10 times your annual salary

The key to saving for these goals is to develop a timeline. Have milestones, like the multiples of your salary for age above, and try to stick to them. This might require a tighter budget, living frugally, or finding other ways to save money. Alternatively, you could try to find a higher-paying job or ask for a raise at your current job. Your budget timeline should be realistic — you don’t have to eat ramen every night like a college kid, but you should be putting a good amount away for your goals.

The key to knowing how much you should save from each paycheck is knowing what your goal is. Then, you can establish a timeline for saving your income, and know how much money you will need in order to meet your personal timeline.

Short-term goals might require more aggressive saving, while long-term saving can take regular contributions and let compound interest do most of the work. If your current situation does not allow for that, it may be worth exploring other options to earn more money, or simply tighten your budget and spend less. Strike the balance, and keep saving toward your goal.

Aim to Save 20% of Your Monthly Income

How much should you save every month? There is no one universal answer to this question. However, your goals are likely to help you decide. A general rule of thumb is to save 20% of your income. Or, there’s the popular 50/30/20 budget plan, in which 50% of your income goes to essentials like utilities, rent or mortgage, and food; 30% for non-essentials and things you simply want; and 20% into savings.

This is where the 50/30/20 rule shines. Created by now-Senator Elizabeth Warren and her daughter Amelia Warren Tyagi in their book “All Your Worth: The Ultimate Lifetime Money Plan,” when the senator was a law professor, the idea is to spend 30% of your paycheck on things you want. This can include saving for bigger ticket items.

Let’s say you want to save for a new car in a year and want to make a $5,000 down payment. You would want to make sure that you saved at least $417 each month. That $417 should be no more than 30% of your paycheck, and preferably less in order to buy other non-essential items. Otherwise, you can extend the timeline and save less each month over a longer period of time.

However, these are very generalized numbers and do not take into account your income level, goals, and actual ability to put away money that you don’t immediately need.

How to Save Money Each Month

Your monthly expenses/income may fluctuate throughout the year, so it’s a good idea to have a unique annual savings goal. If you can’t save as much one month, you can make it up the next month to hit the annual goal and stay on track. You can use a similar trick to save money each week; what works best depends on your goals and income/pay schedule. There are many ways to save money each month, such as:

  • Creating a budget;
  • Paying yourself first;
  • Selling your stuff;
  • Taking advantage of coupons and rebates;
  • Buying generic;
  • Watching unnecessary spending;
  • Canceling memberships.

Additionally, creating a savings plan can help you stay on track. For instance, having a specific goal, e.g. saving $50 each month, is more attainable than having a vague goal, e.g. becoming a millionaire. To create a savings plan, you must first set a budget to decide how much you can save per month. Then, monitor your spending to help keep you on track.

For Your Emergency Fund: $1,000

Putting a small amount away each paycheck, even just $50, can help when an emergency happens. If you suddenly need $1,000 to fix a car, but haven’t been saving for an emergency fund, it can strain your bank account.

You should have at least $1,000 in an emergency fund. However, you should also consider saving between three and six months’ worth of living expenses. This way, if you are unable to work because of a layoff or extended illness, you’ll be able to continue paying bills and keep food on the table.

For Retirement: $1 Million

By the time you retire, you will want to have at least $1 million in savings. This sounds like a near-insurmountable number when you simply read it, but this includes your bank account, any retirement accounts, and any pension you might receive.

The best way to save for retirement is to start now. The longer your account is open, and the more you contribute to it, the more time your funds will have to accrue compound interest.

For example, by the time you are 35, you will want to have double your annual salary saved. By 40, you will want three times your annual salary. The more you save, and the more time you have, the easier this will be to accomplish.

To put this in perspective, the average Fidelity Investments 401(k) account balance was $103,700 in quarter one of 2019. The average IRA account held slightly more, at $107,100. How much does compound interest and time affect a retirement account?

A millennial who started a retirement account with an average of $7,000 in 2009 now has an average account balance of $129,800. In 10 years, the account grew, on average, by nearly $123,000. Older millennials are just hitting their mid-30s, meaning they still have another 30 years to let interest accrue.

For College: $3,000 to $36,000 a Year

Knowing how much to save for college involves understanding the different factors that affect college tuition, such as:

  • Private versus public college;
  • In-state versus out-of-state tuition;
  • Living on campus versus living off-campus;
  • Where the college is located.

However, there are average costs of tuition and fees that you can base your savings off of:

  • Public in-state tuition and fees: $10,116;
  • Public out-of-state tuition and fees: $22,577;
  • Private tuition and fees: $36,801.

There are also less traditional college routes, including:

  • In-state community college tuition and fees: $4,799;
  • Out-of-state community college tuition and fees: $8,576;
  • Trade school tuition and fees: $3,000 to $15,000.

While these amounts can seem daunting, there are many ways to save for college, including:

  • College savings accounts;
  • Traditional savings accounts;
  • IRAs;
  • Investment accounts.

Remember, finding the best way to save for college will depend on what type of college it is, where it is located, and the amount you can obtain from grants, scholarships, and financial aid.

For a House: 20 to 30% of the Total Home Value

Similar to the cost of college, the cost of a house can vary greatly. By understanding all the factors that affect a house price, you can determine how much you should save for a house. According to data from Realtor.com, the median cost of a house was $349,050 as of July 2020. It’s important to note that this sticker price only accounts for the property value and does not consider the hidden costs of buying a house.

Many aspiring homeowners do not have the money to buy the house outright. Instead, they focus on saving for the upfront costs, like the down payment, closing costs, and broker fees. To understand how much money you will need for the upfront costs, consider the following:

  • Down payment: 20% of the total cost of the house.
  • Closing costs: 3 to 5% of the total cost of the house.
  • Broker fees: 5 to 6% of the total cost of the house.
  • Mortgage insurance: 0.5 to 2% of the total cost of the home.
  • Recurring monthly expenses: $800 per month, on average.

For instance, if you buy a home that is listed at $250,000, you can expect to pay:

  • Down payment: $50,000;
  • Closing costs: $7,500 to $12,500;
  • Broker fees: $12,500 to $15,000;
  • Mortgage insurance: $1,250 to $5,000;
  • Recurring monthly expenses: $1,100 (the national average for mortgages).

One way to cut costs, in the long run, is to put down 20% for your down payment; that way, you won’t have to get mortgage insurance.

For a Car: 10% of Your Net Income

Knowing how much to spend on a car can help you avoid being stuck with a car loan you can’t pay. As a general rule, you should aim to spend 10% of your net pay on a car loan per month. For example, if you have a net income of $3,000 a month, you can spend up to $300 a month on a car loan comfortably. It’s also important to take into account other car expenses that could affect the price of your car loan, including:

  • Interest;
  • Loan term;
  • Down payment.

Similar to buying a house, the more money you put down beforehand can help bring your monthly payments down. Generally, you want to aim to put down 20% of the total cost of the car. With the above example, at a down payment of $3,940, an interest rate of 4.4%, and a monthly payment of $300, you could afford a vehicle that is about $19,000.

For a Baby: $15,800 to $21,200

There are many costs of having a baby. The average initial costs include:

  • Medical services: $2,000;
  • Delivery: $10,000 to $15,000;
  • Baby gear and furnishings: $3,000;
  • Childcare: $800 to $1,200 a month;

There are also recurring costs associated with having children, including:

  • Healthcare costs;
  • Health insurance costs;
  • An emergency fund;
  • Diapers and hygiene items;
  • Food.

It’s typically easier to save for the initial costs before having a baby, as they are a one-time expense. To save for the recurring costs, you can implement the items into your monthly budget.

For a Vacation: $2,000 per person

The cost of a vacation should not stress you out, and should not take priority over your other monthly bills. By saving for a vacation ahead of time, you can avoid becoming stressed out financially.

The average person spends roughly $1,979 annually on vacations. However, this price can vary widely depending on the destination. For instance, according to a Bankrate study, people spend about $200 more when they vacation on the West coast compared to the East coast. When you plan a vacation, you’ll want to keep the following expenses in mind:

  • Accommodations;
  • Meals and snacks;
  • Cost of activities;
  • Activity-specific gear;
  • Transportation;
  • Emergency funds.

All of these expenses can seriously affect the cost of your vacation. Once you’ve calculated your vacation expenses, create a vacation savings plan to easily save up money for your next getaway.

For a Wedding: $33,900

The average cost of a wedding is around $33,900. Broken down, this amount includes:

  • A wedding dress;
  • The venue;
  • Food;
  • A photographer;
  • Wedding flowers;
  • Wedding entertainment;
  • A wedding planner;
  • The officiant;
  • Transportation;
  • Rehearsal dinner;
  • Invitations;
  • Party favors.

When deconstructed, you may see that a $33,000 wedding pays for a lot. Luckily, by planning ahead, you can either DIY some wedding items, enlist the help of family and friends, or try to negotiate prices with your vendors, which can effectively help cut wedding costs. Additionally, not all of these wedding items are necessities — creating a budget and understanding what’s important to you could help you save money as well.

For an Engagement Ring: $7,892

In the past, many name-brand jewelers advised clients to save three months’ salary for an engagement ring. The average cost of an engagement ring is somewhere near $7,829. However, as with all expenses, there is no rule saying you must spend that amount on a ring. Additionally, other factors including region, the type of stone, and the size of the ring can help determine the cost of it.

One way to save for an engagement ring is to figure out what your partner would like beforehand and create a budget for it. That way, you can comfortably pay for the ring knowing your partner will be satisfied.

Building your savings can be overwhelming. Whether you are saving for a house, a vacation, or a child, it may seem like your goal is unattainable or taking too long. However, by knowing how much to save and creating a savings plan, you can reach your financial goal while avoiding stress.


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