Saving money is the backbone of financial planning and generating wealth. Without margin between your income and spending, which creates savings, it’s impossible to create wealth. Your savings fuel everything downstream that we typically call financial planning or investment management. It truly all begins with saving money.
When asking the question of how much should you save every month, the goal is to break down this larger process into bite-sized steps. Having $2 million when you retire is a big goal and isn’t really actionable. Boil that goal down to a monthly savings goal? Now that’s actionable.
And that’s our goal here today. To provide actionable guidance on the topic of how much money you should be saving each month with the purpose of building significant wealth and accomplishing your financial goals.
Now, everyone is in a different situation. Incomes vary. Family size can vary. Your starting point will be different from others. That’s ok. We’re going to provide enough generalized information to make this guide very relevant to everyone while also providing specific guidance with respect to a number of different individual scenarios. We hope this guide on saving money each month is a major step in your financial journey.
Now that we’ve gotten started here, let’s look at where we’re going to give you an idea of what to expect as you continue through this guide.
- Three approaches to saving money
- The traditional approach
- The 50/30/20 model
- The FIRE approach
- An overview of accumulation mode investing
- What if I’m having trouble saving money? Tips to help you jumpstart your saving.
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Three approaches to saving money
The traditional approach
Dave Ramsey has popularized his “baby steps” method of financial management and saving money, and it’s a good representation of the traditional approach of saving money. The idea here is that once you’re out of debt (other than your mortgage), you first establish an emergency fund where your expenses are covered for a period of time should you have income disruption, then you layer in things like retirement savings, saving for a house, save for your kid’s college and more.
So, let’s try and boil this traditional approach down a bit in a way that will let us calculate how much you should save every month on an ongoing basis. Here are the categories for saving money, or what we need to save money for:
- Emergency fund
- Home (down payment)
Let’s look at each one, then tally it up together to determine a good estimate for how much you should save every month.
Typically in personal finance, you’ll hear the idea that you need to have an emergency fund of three to six months worth of your expenses. This is a decent starting point, but I think few people will ever regret having a larger emergency fund that will cover maybe up to a year’s worth of expenses.
You also should adjust your emergency fund based on some major life factors such as how many dependents you have and how risky or secure your job or income might be. Some individuals work in boom/bust type job situations where they can make a lot of money when times are really good and no money for a whole year when times are bad. These types of people should have an emergency fund of an entire year. Additionally, if you have a bunch of kids and life is frankly just expensive, again, maybe consider a bigger emergency fund.
For our calculations today, we’re going to go with six months worth of expenses, and we’re going to estimate that these expenses represent 50% of your income. In all likelihood you’re spending more than 50% of your income, but in an emergency you also have a lot of lifestyle expenses that can be cut or paired back. So, assuming six months of half your income might be a decent starting point for an emergency fund amount estimate (again, adjust this as needed based on your personal situation).
You might skip this category if you already have an automobile paid off, but most people don’t, so we’re going to address it. Also, it’s interesting that most savings guides don’t consider automobiles frankly because most people are comfortable with automobile debt. Be different and save up money and pay cash for your car. You’ll be much better off without a chunk of money going to your car payment each month. You might not have the nicest car on the block, but at the end of the day, who cares? You’ll be stashing more money away every month into your bank account and investments.
So how much money do we need to save for a car? A decent rule of thumb is that you automobile purchase should not be more than half your income. In actuality that is probably high as well. Go conservative and buy a used vehicle.
So, let’s say one third of your income.
Home Purchase (Down Payment)
Putting 20% down on your home purchase is huge as it lets you avoid the added expense of PMI. Mortgage insurance is required by banks when you don’t have enough equity in the home. Get to the 20% down payment amount to not put this extra burden on your finances.
So, 20% of what? How much house can you afford? We can use the rule of thumb where your mortgage payment should not exceed 25% of your take-home pay. So, if you make $100,000 and after taxes you bring in, say $80,000, that would equate to $6666 per month in take-home pay. 25% of that would be $1,666. If you assume a 4% mortgage for 30 years, that comes out to a mortgage balance around $275,000. If that’s 80% of the purchase price, you’re at a house price of about $343,000. Let’s be conservative and just say $350,000. This means you need to save up for a down payment of approximately $75,000.
Now there are a lot of variables here that are specific to your calculator, so you’re going to have to do the math individually. For instance, your taxes might vary widely depending on where you live and your personal situation.
For our ballpark purposes here today, let’s assume you need to save 75% of your annual income for a down payment. This is obviously going to vary depending on personal situations, but this will give us a good number to plug into our calculators when determining how much you should save every month.
Estimates for how much money you need to save for education are all over the map. Yes, education costs have skyrocketed in recent years, but I also think that some guidance on this subject is unrealistic and a bit much. Not everyone needs to save the equivalent of a four-year private school degree for each kid. Frankly, you don’t even have to save up the equivalent for a four-year in-state public school college for every kid.
If you don’t pay 100% of your kid’s college expenses, it’s ok. Your kid will survive. Maybe a realistic goal is to ensure that 50% of your kid’s in-state college expenses are paid for? Then do your best to limit the amount of debt that is used to pay for the remaining portion (by cash flowing some of the expenses and having your kid work during college a bit).
To keep things simple, we’re going to go with a fixed amount goal. Our goal is going to be to do $100 per month for each child every month from the time they are born through 18 years of age.
We’ll assume you have two children, so this will be $200 per month.
In an ideal world, you’re saving about 20% of your income for retirement, and you started this at a relatively early age. Some people use the 15% number.
It’s common to think, well, I’ll save 15% while I’m saving for a down payment for a house, and then after I buy my house, I’ll switch to 20%. But that logic is flawed somewhat, as other life expenses tend to come into play such as kid’s college funds. Plus as your kids get older, expenses just tend to grow. Do your best to stick with 20% throughout every stage of life. For our purposes, we’re going to plug in 20% here.
Save for everything simultaneously? Or prioritize during different phases?
If we total up everything we did, it’s going to result almost all your income going to savings. But that’s not really realistic and frankly it doesn’t reflect real life. So, let’s identify some phases on how to approach this.
Phase 1 will be establishing an emergency fund and purchasing your vehicle. Phase 1 is not a wealth building phase of life, so your goal is to get through phase 1 as fast as possible so you can get to phase 2.
Phase 2 will introduce retirement savings which will continue through all remaining phases. Phase 2 will also include saving for your down payment. You will not need to save for an emergency fund or vehicle purchase during this phase since we will assume a fully funded emergency fund and the idea that you already bought a vehicle.
Phase 3 will assume you purchased a home, but it will introduce college savings. You will continue saving money toward retirement.
Ok, so how much should you save every month?
For phase 1, you need to save up 50% of your monthly income x 6, or 25% of your annual income for your emergency fund. What is 25% of your income? Well if you make $50,000, you need to save up $12,500. If you make $75,000, you need to save up $17,500. If you make $100,000, you need to save up $25,000.
Your goal should be to save this up in one year or less. So, if you make $50,000, then you need to save approximately $1,000 per month. If you make $75,000, you need to save approximately $1,500 per month. If you make $100,000, you need to save approximately $2,000 per month.
This might be a challenge, but be willing to make some real sacrifices to get it done. Your goal is to get through phase 1 as soon as possible so that you can move to phase 2 and beyond which are wealth building phases.
Once you establish the emergency fund, you can move to the automobile savings phase. Now most of you probably already have a car, so this might look like paying off your existing car. Or it might look like paying off your existing car, plus building up a sum of cash to pay for your next car. Either way, use the same amount of monthly savings that you were doing for your emergency fund to tackle this goal.
Through phase 1, your goal is to aggressively save the following amounts to first fund your emergency fund and then to ensure you have a reliable vehicle debt-free:
For phase 2, we will assume you have your emergency fund in place and a paid off vehicle. Your focus here is to begin saving 20% of your income into retirement and also begin saving for a home. To keep things simple, let’s assume that you’re also saving 20% of your income toward a down payment.
Now the beautiful thing here is that your retirement savings can often be done through some tax-advantaged methods such as a 401(k) plan, plus you can take advantage of company matching opportunities. This means that you can often get to that 20% threshold without actually putting away 20% of your income. This will depend on your individual situation.
To keep things simple, here’s a chart of what you should save every month if your goal is to save 20% of your income for retirement and 20% of your income for a down payment toward a home. Note that taxes are not factored in here since taxation varies wildly based on personal filing situations.
Now, if you don’t have kids, you don’t need to transition to phase 3. Instead, you can transition to phase 2b where you no longer need to save money for a down payment (because you already purchased a home). Phase 2b could be you beef up your retirement savings, or you keep saving the 20% of your income that you were saving for a down payment and instead you just throw that extra cash toward your mortgage balance.
If you do have children and move on to phase 3, we’re going to keep things really simple here and do the $100 per month method per child for 18 years. For example purposes, we’ll stick to the two children example. So, we’ll be saving 20% toward retirement, plus another $200 per month toward your children’s education funds.
The following chart shows you how much you should save every month in this scenario:
You might be thinking that $200 per month really isn’t that much for education savings. Will that really do much for helping my kid goto college? Well, let’s run the numbers and verify this.
If you contribute $200 per month and get an average annual return of 7% on your investments, the money will grow to just over $86,000 in 18 years. Divide this by 2 and you’ve got $43,000 per kid towards college expenses. As we talk about in our article on how much to save for college, this would cover almost half of your kid’s college expenses of an in-state school based on current rates. Now college costs are expected to grow in the future, so this might be insufficient, but this gives you a good starting point for helping your child pay for his or her college education.
The following chart shows you what you can achieve if you contribute $100, $200, $300 or $400 per month for your child’s education fund every month for 18 years:
The 50/30/20 Model
The 50/30/20 rule is a simple method to guide how much to spend and save each month. The rule gets its name from an idea that you should spend 50% of your after-tax income on needs, 20% of your after-tax income should be saved and the remaining 30% of your income can be spent on lifestyle and enjoyment.
The 50/30/20 rule can be useful for determining how much you should save every month.
This method differs from the previous approach because it assigns a blanket 20% savings rate which then can flow into necessary buckets such as emergency fund, a down payment, retirement funds and education savings.
The 50% of your income that goes toward “needs” include things such as rent or mortgage payment, health care, car payments, food, and utilities. The 30% of your income that goes toward “wants” includes things such as eating out, entertainment, gym, clothes, vacations and more.
The 50/30/20 approach is a very simple approach that can be a good way to look at personal finance if you’re just starting out. As you get used to the framework, perhaps consider upgrading to the more traditional approach outlined above where you get more aggressive and more detailed.
Here is a look at the monthly amounts for each of the 50/30/20 buckets based on annual income:
The FIRE Approach
The FIRE (Financial Independence, Retire Early) approach to saving money is an extreme path of frugality, living on less and saving very large chunks of your income to reach financial independence at a much earlier age than the normal person. For example, it’s not unusual for individuals to save 70% of their income while living a very modest lifestyle so that they can put away enough money to “retire” at an age such as 35 years old.
I believe there are flaws to the FIRE movement. Things such like bear market crashes and being fairly unrealistic for families with kids are two things that come to mind. Still, the FIRE movement can give us a good glimpse at extreme savings rates and what’s possible if you chose to go down this path.
To properly analyze the FIRE approach, we need to understand overall annual expenses, what that annual expenses amount equates to with respect to current income, and then what multiple of annual expenses is needed to achieve retirement and to be able to safely live off the savings indefinitely. For example, if you earn $75,000 per year, but can live on $25,000, then you’re saving $50,000 per year (round numbers, not factoring in taxes). Many assume that you need 25 to 30 times your expenses in retirement funds to safely live off that money. That means you need to save 25 to 30 times the $25,000 amount. That means this person would need somewhere between $625,000 and $750,000 to retirement on an assumed $25,000 per year in annual expenses. If you have $750,000 invested, then $25,000 withdrawal amount represents a 3.33% withdrawal rate which many consider to be relatively safe. Since the FIRE approach means being retired for many decades, I would definitely suggest the more conservative retirement balance of 30 times expenses rather than 25.
The following chart shows us some various scenarios between income levels of $40,000 and $100,000 and savings rates of 40-60%. It shows what the savings level and expenses level are as well as what it looks like to save 30x expenses and how long it will take in each scenario.
As you can see, essentially every scenario in these income and savings rate ranges results in needing 17-18 years to accumulate 30 times your normal expenses. This might seem like a long time, but if you start in your early 20s, in theory, you’re retired before age 40. Not bad, huh?
What are the risks? The main risk is that you have potentially 50 years that you have to live off your investments. Most people underestimate the amount of risk involved in stock marketing timing luck. This is broken out in detail in our previous article on sequence of returns risk, but the idea here is that if you hit a bear market early on in your retirement phase, you can be in serious jeopardy of running out of money. On the other hand, if you hit a major bull market early on in retirement, you might be in excellent shape for decades.
An overview of accumulation mode investing
Accumulation mode investing refers to the phase of investing where your goal is to accumulate assets. You are not withdrawing on your portfolio during this time period. For most people this involves between ages 20-something to 60-something overlapping with your typical timeline of a career. After accumulation mode, you move into retirement or withdrawal mode. There are key distinctions between these two phases, and since we’re discussing the regular savings of money every month, it’s important to address a few things with respect to accumulation mode.
Accumulation mode has a few phases to it. The first phase is all about saving money. In the first phase, your asset allocation and your rate of return is pretty negligible with respect to your savings rate. This is because all of your gains during this phase are essentially a result of how much money you save every month. There simply isn’t enough money yet to generate significant returns. As such, we want to travel through phase 1 as fast as possible so that we can get to phase 2 where your money starts to generate real money.
Let’s look at an example that demonstrates what phase 1 looks like. This is from our article on asset allocations for young investors:
The following chart shows the progression of saving $250 per month across four different asset allocations (100% stocks, 80% stocks / 20% bonds, 70% stocks / 30% bonds and 50% stocks / 50% bonds). For each allocation, we use the average return shown from the Vanguard data (listed above).
As you can see, the differences aren’t huge here. The most aggressive portfolio of 100% stocks hits the $50,000 balance threshold at month 120 (10 years) when saving $250 per month and assuming the average return of 10.1% annually. The 50 / 50 conservative split hits the $50,000 balance threshold at month 128 (10 years, 8 months) when saving $250 per month and assuming the average return of 8.2% annually. So, in essence, by going more conservative, it takes eight months longer to hit the threshold than if you went as aggressive as possible. Considering either approach takes ten years, an extra eight months is fairly trivial in the long run.
The excerpt above shows that various asset allocations really don’t matter in phase 1. All that matters is saving money. That is what moves the needle.
So, this should motivate you! If you’re in phase 1, use this information to motivate your savings and push yourself to save more and more every month. Get through phase 1 as fast as possible.
In phase 2 of accumulation mode investing, you’ll get to the point where your monthly returns can exceed your monthly contributions. That is when investing starts to get really exciting. This is the path to those wonderful compounding charts where the right-hand side of the chart turns into a hockey stick with a near vertical rise in your net worth. It takes money to make money, and your money is all about savings in the beginning.
What if I’m having trouble saving money? Tips to help you jumpstart your saving.
if you’ve made it this far, it means you’re serious about learning how much you should save every month, and you’re serious about building your net worth.
Some of us have trouble getting started and have trouble saving money. Let’s look at a few tips to help you jumpstart your savings so that you can get on track with some of the various approaches discussed in this article.
#1 – Start with the big expenses
We’ve all heard the advice about saying no to that daily $4 latte, but the reality is that for most of us, the lattes are kinda insignificant compared to the big ticket expense items. For instance, some of you are earning $30,000 per year, yet have a $500 car payment every month. Or you might be earning $200,000 per year but you’re paying a mortgage on your primary residence as well as a beach condo. The reality is that if you have huge ticket items laying hold of your income before you can even figure out budgets and savings plans, it’s going to be very difficult to win. Your first goal needs to be to get your big ticket items in check. Your housing, your car, health care, etc.
#2 – Get out of debt
If you have non-mortgage debt, then none of what we’ve talked about really applies yet. You’ve got to get out of debt to even get to the starting line. Find a good, get out of debt plan (consider Dave Ramsey) and make it happen. Then you’re ready to begin.
#3 – It might be an income problem
Sometimes you’ve got an income problem. This is a tricky thing to address though because you can win financially even with a very average income. You just have to set your expectations correctly. However, if you think you’re falling short of your income potential, you’ve got two ways to address it. First, you can pick up additional work or a second job to boost income. This can be especially useful when trying to get out of debt or if you’re young without a family.
Second, you can take the long-term approach and try to set yourself up for a higher income down the road for a better long-term career. This might involve switching careers and working your way up from the bottom or going back to school.
Personal situations will dictate the choices here, but give this some strong consideration.
#4 – Be willing to be weird with your peers
A lot of spending comes with just going along with your peer group. It might be an expensive dinner out with friends where the cocktails are flowing and all of a sudden, you’re spending over $100 on a dinner. Or it might be a trip you agree to take with friends. Either way, you’re going to have to be willing to say no sometimes and just stay home and watch Netflix. It can be hard especially if you’re young and single, but these decisions can add up and lead to some significant gains over time.
#5 – Get comfortable with written budgets and plans
Over the long haul, you’re going to have much more success if you’re good at writing down budgets and plans and then using that plan as you go through life. It doesn’t mean you always stick to the plan perfectly, but it means you are aware of the plan at every decision and you modify the plan accordingly if things change. Written down budgets provide an enormous help for guiding you through daily decision making. Your bank account and investment balances will reflect your discipline here over time.