How much money should I save monthly?

How much should you have in savings? That’s an eternal question, one that underpins any long-term financial planning you might do.

There are no hard and fast rules for saving because your income, spending, lifestyle, and financial goals differ from the next person. You can save what you have left over, but how do you know if you’re saving enough for emergencies or retirement? What can you do to increase that monthly saving amount?

Here are a few things to consider as you establish your savings plan.

The role of savings in financial security

Savings provide a layer of financial security for future life events, such as a down payment for a house or preparing for retirement. Your savings is also a cushion to keep you afloat if you incur unexpected medical expenses or job loss.

Notice a trend here? Being financially secure doesn’t mean you have to have a high salary, live in an expensive house, drive a fancy car, and take lavish vacations.

Instead, having financial security means you know how to prepare for the future. If you live at or below your means now, you’ll have more flexibility and options later — potentially when you need them the most. When you’re financially secure, you control your money no matter what life throws at you.

Evaluate your income and expenses

Your first step toward financial security is evaluating your after-tax income and living expenses. Identify all the money coming in from your job, side gigs, and passive income streams. If your current income varies monthly, calculate your average monthly income.

Next, identify all your monthly expenses. Some of your costs will be easy to ascertain, like your mortgage or rent, utility bills, car payments, and insurance premiums. Others, such as groceries and clothing, might not be as clear-cut because prices fluctuate due to inflation.

Consider your discretionary expenses, like dining out, entertainment, and monthly subscriptions. Now is an excellent time to eliminate costs for things you don’t use. For example, perhaps you have a streaming service you haven’t watched in months, or you’re paying for a monthly family pass to a local amusement park. You can redirect that money toward your savings.

If you find that much of your money goes toward frivolous items, consider implementing a few new rules to limit your spending. For instance, you might allow yourself one night to dine out every two weeks and eat at home the rest of the time. Similarly, you could consider cutting out your morning coffee run and replacing it with a cup of joe from your kitchen.

Once you subtract your monthly expenses from your monthly income, you should have leftover extra money available for savings. If that amount isn’t as high as you’d like, reevaluate to cut other costs or find additional earning sources.

Establish your financial goals

Knowing the importance of saving money isn’t enough to get started. Set specific financial goals to stay on track with your spending and saving. Your goals could include paying off a credit card, building an emergency savings account, or establishing a retirement fund.

When you have financial goals, you decide on your spending priorities and hold yourself accountable to them. Without goals, it’s easy to lose control of your money now, potentially resulting in some serious financial trouble later.

Define your monthly savings based on goals

Once you’ve defined your goals and decided what you want, your next step is creating objectives, or a game plan, to determine how to achieve those goals.

Calculate your monthly savings for different goals.

Set a specified timeline and a dollar amount for your goals, but be realistic and reasonable based on your salary, other income sources, fluctuating interest rates, and monthly expenses. To help with your calculations, use the U.S. Securities and Exchange Commission’s savings goal calculator. For instance, your goal could be to save $24,000 in an emergency fund within two years. At a 4% annual interest rate, you only have to save $918.77 a month to reach your goal after an initial $1,000 investment.

It’s a good goal and objective with a reasonable timeline — if you can afford to put away that amount each month. But what if you can only afford to put away around $300 a month? That’s OK, but understand that your timeline extends to about six years to complete that goal.

Adjust your monthly savings plan as needed

Once you decide how much you can save, monitor your progress over the next few months. Make adjustments if you’re not meeting your savings goals. However, don’t be so quick to reduce your monthly savings amount. Instead, review your expenses again to see if you can cut anything else.

If you can’t find more ways to cut expenses and still can’t keep up with your original objective, reduce your savings amount. This changes your objective, but your goal remains the same. However, remember that cutting your savings extends your goal’s timeline.

How to use the 50/30/20 rule for budgeting

Financial planners often refer to the 50/30/20 rule for setting monthly budgets. According to the rule, 50% of your income goes toward necessities and 30% toward discretionary items. You then save the remaining 20%.

The 50/30/20 rule provides concrete savings guidelines, but it’s not a standard rule across the board. If you have limited means, you may struggle to use only 50% for your basic needs, let alone be able to set aside 20% of your earnings for a savings account. Others may find that saving 20% of their income isn’t enough to meet their objectives.

If the 50/30/20 rule works for you, start with that. But it’s OK if the rule doesn’t work for you. You can devise a different strategy if necessary.

Consider emergency funds in your savings plan

Having enough in your savings account can be a lifesaver in an emergency, such as losing a job, facing a medical issue, or needing a major car repair. In fact, consider making an emergency fund one of your first financial goals.

The importance of building an emergency fund

When you have an emergency fund, you stay calm about paying for unexpected expenses. An emergency fund is just one element of preparing for the future and staying in control of your money.

Without an emergency fund, you’ll likely take on debt, possibly on top of existing debt, to pay expenses. At that point, it’s much harder to pull yourself out of the hole and get back on track financially. An emergency fund can save the day if you find yourself on uncertain financial footing.

How much should you save for your emergency fund?

The recommendation is to have at least three to six months of your regular earnings saved for emergencies. For example, if your monthly earnings are $6,000, your emergency fund can have $18,000 to $36,000.

That may sound like a lot — especially if you don’t have any savings or live paycheck to paycheck. But this is another reason why goals and objectives are useful for achieving financial security.

If your goal is to save six months of monthly earnings for emergencies, you can decide how long it will take to meet that goal. It could take you a few months to a couple of years. The point is that you’re saving each month. And that consistency overflows to more wise financial decisions, resulting in you staying calmer and in more control when life’s surprises inevitably occur.

The importance of long-term financial planning

Long-term financial planning prepares you for the future. When you adequately anticipate your needs, like buying a home or retiring, you build healthy financial habits that carry on through life. You feel secure knowing you have the money to pay for life’s ups and downs.

Establishing your financial goals early in life can help. However, it’s never too late to start.

Another financial goal is protecting your family’s long-term needs in the event that you can no longer provide for them. A term life insurance policy provides peace of mind, knowing that your loved ones can pay for expenses after you’re gone. Start your journey with a free life insurance quote today.