You know you should be saving every month, but do you know how much? Some people figure if they put a little money aside they’re doing great.
It may not be enough.
The earlier you save for all your financial goals, the faster you’ll reach your desired outcome. Taking advantage of compounding interest is the only way to make your money grow fast.
So how much should you save? Check out our tips below.
Target This Percentage of your Income Each Month
Eventually, you should save 20% of your income. If you bring home $6,000, that’s $1,200 saved a month.
You’ll work up to this. Make this your ‘ultimate goal.’ For now, figure out how much you can save. Use the 20% rule, setting aside 20% of your income for savings AND debt payoff.
High-interest debt eats the interest you’d earn on any savings. For example, let’s say you have a rate of return of 3% on your conservative investments, but you have credit card debt with a 19% interest rate. You aren’t doing yourself any favours by saving at 3% and letting 19% interest accumulate on your debts. Use the 20% of your income to pay off your debts and work your way up to saving the full amount.
What Should you Save For First?
If you don’t have an emergency fund, start there.
An emergency fund should have 3 to 6 months of expenses. If your expenses are $4,000 a month, you’ll need $12,000 – $24,000 saved. Don’t let that overwhelm you – start small. Aim to save $1,000 and work your way up.
Along with your emergency fund, save a rainy day fund. An emergency fund is only if you lose your job or can’t work. It would help fill the gap until you found a job or were able to work again.
A rainy day fund covers unexpected expenses, not in your budget. Things like car repairs, house repairs, or a sudden medical expense are rainy day expenses.
Where Should you Save?
Keep your savings in an account not easily accessed. A high-yield online savings account is best. You’ll earn a little more interest (no account is paying excessive rates right now) and won’t have easy access to the funds like you would in your checking account or savings account at your local bank.
How to Save if you Live Paycheck-to-Paycheck
Are you thinking that you live paycheck-to-paycheck and saving could never happen? Here are a few simple tips:
- Cut back on a few expenses and save the difference
- Negotiate your bills (insurance, utilities, credit card APRs) and save the difference
- Start a side hustle
- Bank any windfalls (tax refunds, work bonuses, or raises)
Don’t worry if you don’t come close to saving 20% of your income right now. Aim for that percentage, but for now, save as much as you can. Every dollar counts because a dollar saved today is worth a lot more 1, 2, or 10 years from now.