Saving money each month has significant advantages. You don’t see those benefits right away, but your money will compound over time and can create financial stability. You can build wealth, retire sooner and save up for upcoming expenses. You can set up a vacation fund to plan your next getaway instead of going into credit card debt. These results can happen if you save some money each month. While everyone’s personal finances are different, setting monthly savings goals can help you fortify your wealth and achieve financial milestones.
Ways to Decide How Much Should You Save a Month
Saving a little bit each month adds up if you look at long-term horizons. Saving an extra $50 each month leaves you with an additional $12,000 in 20 years. Increasing your monthly savings gives you more in retirement, and that doesn’t include compounded returns from any investments.
Even though each person’s financial situation is different, several tried-and-true methods have helped people save money and grow their portfolios. But first, we’ll cover some strategies to devise how much you should save.
Set Realistic Goals for Yourself
You can’t save every dollar you make since some of each paycheck will go toward living expenses. Everyone pays for housing, food, utilities, and other essentials. Some people have obligations such as student loans that get in the way of profits. It’s important to distinguish necessary costs to avoid setting lofty expectations. Falling short of excessive goals can be discouraging and tempt you to forgo good financial habits.
However, not every cost is essential. You don’t have to buy a new car or stay up to date with the latest smartphone. When goals become more realistic, it’s easier to discover opportunities for improvement. These types of goals help consumers generate momentum and build their retirement savings.
Every small contribution can make an impact on your long-term finances. Saving $50/mo may not turn you wealthy overnight, but it’s a step in the right direction. Some people can cancel a subscription and put those proceeds in an emergency fund. Your definition of “realistic” will change over time.
A common rule of thumb is to save 20% of your income, but this can fluctuate as your career and expenses change. Some people saving $50/mo reassess their finances and realize it’s possible to save $100/mo with minor adjustments. Contributing to a retirement savings account with an employer match can increase your savings without additional work. You will also get tax advantages when investing in a retirement account. You don’t want to set an overly ambitious goal right out of the gate and then get discouraged along the way.
Determine What You Are Saving For
Your savings objective influences how much money you should save each month. It makes sense to stash more money if you’re saving for a down payment than if you’re getting ahead of holiday shopping. We know down payments require more capital than holiday plans. However, those expenditures vary significantly. It’s good to plan out how much you’ll need to achieve your objective.
A down payment’s total depends on the location, house size, and other factors. People saving up for real estate should look at the selling prices of properties that fit their criteria. For example, homebuyers seeking a $500,000 property on a 20% down payment should save $100,000. Lowering your down payment to 10% only requires $50,000 in the bank before a transaction. Homebuyers should then consider if they can afford mortgage payments before buying a home.
Holiday shopping is more straightforward than a down payment, but it’s no walk in the park. You’ll have to plan out how much money to spend on gifts for each loved one. Each savings goal has different requirements. Knowing the desired result and how much money you need to get there will help you save optimally.
Calculate How Long It Will Take You to Save for Your Goal
Once you figure out how much you need to save, you can calculate how long it will take to save enough money. For example, if you are saving up for a $50,000 down payment and can save $500/mo, it will take 100 months (8 years and 4 months) to accumulate enough money. Saving money with a partner, house hacking, and increasing your monthly savings can help you achieve the goal sooner. This stark realization is better than a pretty lie. The truth can inspire you to pursue a side hustle or another opportunity to boost your monthly income. A mobile banking app can provide these insights and help with saving money.
Saving for $500 worth of holiday shopping doesn’t take as much savings. If you save $100/mo, you can reach your milestone in five months. Adding an extra $25/mo gets you there in four months. Knowing how long it will take will either make you feel confident in the current course or seek a new approach.
It is a good idea to set goals like these for big expenses like down payments and vacations. While multiple bank accounts let you see your financial goals more clearly, everyone should build up an emergency fund. An emergency fund is a capital you can tap into for an emergency. Workers do not have control over how much the cost of living will rise or if they will get laid off next week. Good workers can still find themselves looking for a new job if the company loses market share.
An emergency fund shields you from financial distress and gives you time to find a new job, pick up a side hustle, and get back on your feet. It is a good idea to save at least six months’ worth of living expenses in your emergency fund. Some people aspire to save 12-18 months of their living expenses after reaching the 6-month milestone. A higher savings rate will make it easier to meet each of your financial objectives.
The 50/30/20 Rule
Some financial models present budgeting solutions for everyday consumers. While imperfect due to various financial situations, they shed light on common savings approaches. The 50/30/20 Rule is a popular budget rubric that suggests the following money allocation approach:
- 50% of your money goes towards needs
- 30% of your money goes towards wants
- 20% of your money goes toward savings
This method splits three major expense categories and asks you to decide how you’ll allocate each dollar. This approach puts most of your funds into needs and savings. Only 30% of the money goes toward purchases that aren’t necessary. Consumers can tweak this rule to their liking. Some people may flip wants and savings. Putting 30% of your money into savings increases your monthly contribution by 50%.
Some people don’t need to spend 50% of their money on wants. These people can embrace a 40-20-40 approach where the following takes place:
- 40% of your money goes towards needs
- 20% of your money goes towards wants
- 40% of your money goes toward savings
The more money you put into savings, the less you’ll worry about it in the future. Of course, you don’t have to follow 50-30-20 to a tee, but you should decide the percentages for needs, wants, and savings. Having these percentages in place will build your discipline and help you more effectively manage your finances.
How To Boost Your Savings Each Month
Higher savings create more financial possibilities. You can save up for a high-ticket item or retire sooner. The financial security of not living paycheck to paycheck can feel liberating, but you only get there one month at a time. Regardless of the reason, many people want to save more money, and good habits will get you there. These personal finance strategies will help you boost your monthly savings.
Track Your Spending
Savings are a function of income and expenses. Making more money and lowering costs helps you realize more profits and grow your retirement savings. Expenses are easier to tackle initially since you can make changes overnight. Canceling a subscription immediately increases your monthly savings. Tracking expenses makes you more aware of unnecessary costs and establishes reliable savings habits. You will think more carefully each time you consider spending money on goods and services. It’s good to be conscious each time you spend money so you can back away from unnecessary purchases and feel more comfortable buying something when it makes sense.
Pay Off Your Debt
Financial obligations work against consumers seeking an earlier path to retirement, especially high-interest debt. Paying off your credit card debt and other obligations minimizes interest. Letting debt grow results in additional fees and interest that make it more difficult to get out of debt. After covering necessary expenses, consumers should prioritize debt with the highest interest rates. A higher interest rate increases compounding, so it is a good idea to get rid of this debt first.
Automate Your Savings
When was the last time you forgot something? We’re not perfect, and when it comes to finances, it’s easy to make mistakes. Some people forget to move money from a checking account into a savings account and fall behind on their goals.
Creating a bank account for each goal and automating your savings lets your finances thrive even if you don’t check on your accounts every day. An emergency savings account can help with a rainy day, and retirement accounts make the future feel more certain. Automating your savings across each account ensures proper money allocation even when you forget. You can automatically move money to other accounts and portfolios that align with your preferences. This process also saves time since you don’t have to transfer money to your savings accounts manually.
Increase Your Savings Gradually
Increasing your savings moves you closer to your goals and makes it easier to get more ambitious. However, raising your monthly savings target too aggressively can lead to burnout and discouragement. Finding a middle ground and increasing savings gradually leads to sustainable growth. You can monitor your finances and work on this yourself, but some financial products can help you along the journey.
Invest Your Savings
Investing your savings puts your money to work, and a simple exercise with a compounding interest calculator demonstrates possible outcomes. If you invest $10,000 and earn an 8% annual return, your initial investment becomes $217,245.21 after 40 years. This calculation also assumes you do not invest another dollar.
Many people use investing as a vehicle for retirement, but some people worry about losing their money in assets. The 8% annual return example is enticing, but you can get a respectable return without taking any risks. People can put their money into a high-yield savings account and just watch their money grow for them.
Ultimately, how much you save each month depends on a number of factors, but it should always be based on your own unique circumstances; the key is to be consistent with it and make good financial decisions on where to save your money.
