Financial Literacy

How Much Should you Save Per Month?

There is no hard and fast answer on how much you should save per month because your individual needs and financial situation will dictate this. However, the rule of thumb is 10% for savings and another 10% for investments. 

How do you know how much should you save per month? 

Saving is hard. There, we said it. 

It’s not easy to put money away for some future version of yourself, especially considering we’re living in a convenience culture. When was the last time you had to wait for the potatoes to grow before having your plate of fries? 

But here’s the thing. Saving allows you to build pockets of financial freedom, for instance, creating a comfortable retirement or saving up for that big event such as a special birthday or a wedding. That means that putting money away might not look the same for everyone. 

So how do you decide on the amount? Financial pundits recommend saving 10% of your income per month, but there is no real reason why other than it being easy to account for. That’s why it’s important to know which savings goals you have – so you can save for short, medium, and long term goals at an appropriate amount.

Long-term goals include retirement and education savings and usually take more than 10 years to save for.  Then your medium-term savings can be things such as saving for your dream home’s downpayment and should take 2 to 10 years. Short-term savings can include saving up for new tech, a wedding, and other large-ticket items and usually don’t take longer than a year to save up for. 

Long term or retirement savings

If you want to have $2 million at retirement and you’re only starting to save for it at the age of 35, $100 isn’t going to cut it. Use a retirement calculator to get to your minimum monthly contribution and use products such as traditional and Roth IRAs and your 401(k) to your advantage. It’s also worth knowing how much you need to save to maintain your current lifestyle once you put down tools and do that proverbial golden handshake. 

Medium or short term savings

Medium or short term savings is for items or events that you need some time to save up for, but it’s different from your retirement money. The goal with medium and short term savings is that you’re actually saving up to spend on something specific. Some examples of medium-term savings goals are a wedding or a house down payment.

Emergency savings

Don’t forget about emergency savings. While some may advise a nest egg of at least 3 to 6 months, our founder, Ramit Sethi, pushes his to 12 months’ worth of savings, cash. That takes the edge off in instances such as global pandemics, total market crashes, and just plain crappy economies. 

So 10%? 20%? Start with what you can afford and work your way up. It doesn’t make sense to save 20% but you can hardly pay your bills and you’re placing your credit score under pressure. As you pay off debt and free up expenses, you can increase your savings and investment contributions. If you only spend 40% of your income on payments, it makes sense to put away a little extra. 

In Ramit’s book, I Will Teach You To Be Rich, he recommends the 50/30/20 rule. While this might be a little different than what you’re used to, it’s designed to set you up right for your Rich Life. So how this works is fixed costs are around the 50% mark of your gross salary, savings, and investments in the 30% slot, and to make life a little more fun, guilt-free spending of 20%. 

You can adjust these figures as you meet certain goals and increase your investments or spending as your payments decrease. But the idea is to build yourself a spending pocket that won’t infringe on your financial goals and obligations. 

We have to talk about debt 

Now, your savings percentage might also depend on your debt. If you have a credit card with a high balance and a high interest rate, it might not make sense to spend 20% on savings. You’ll have to compare the interest you’re paying on your debt and the interest you’re getting on your savings to determine whether more money should go into paying off debt first. Let’s explain. 

Credit card interest can start from 12.5% APR and go up all the way to 25% and upwards, depending on certain factors. Now, you’re going to find it almost impossible to find a savings account that pays that minimum of 12.5%. On average, savings accounts pay around 0.01% at the bigger banks and can go up to 1% with an online bank. 

If you have a credit card with a balance of $10,000 at a rate of 12.5%, it will take you 36 months to pay it off with a monthly installment of $335. The total interest paid will be $2,040. Bump that up by $100 and increase the installment to $435, and you’ll pay the card off in 27 months. The total interest paid is $1,491 which means you save $549. 

Now, if you decide to stick that $100 in a savings account instead every month for the next 27 months at an interest rate of (best case) 1%, you’ll earn a whopping $31.73. 

One way to make this a little easier on your pocket is to move the credit card balance to a 0% interest card, and look for a long pay-off period such as 36 months. You also want to make sure there’s no balance transfer fee. Then, pay off your credit balance within those 36 months. This might not affect that 10% minimum that goes to savings. 

If this isn’t possible, you still want to pay off that balance as quickly as possible. You might find going 5% extra on debt repayments and 5% on savings might work, or find the ratio that allows you to get out of the red fastest while building up a financial safety net. 

Strategies for saving 

Conscious spending 

Budgeting gets a bad rap and for good reason. It conjures up a financial drill sergeant that whips you across the knuckles every time you order a latte. But at I Will Teach You To Be Rich, we have a different approach. We want you to have those $3 lattes and have as many as you like. 

But here’s the thing. You need to start asking those $3,000 and $30,000 questions in order to make this stick. What do we mean by that? If those $3 lattes are putting you under financial pressure, it means that something big is misaligned in your budget. Start asking questions about your big-ticket items. 

The big-ticket items that form part of your living expenses such as: 

  • Your housing 
  • The amount you spend on food 
  • Your car 
  • Insurances 
  • Subscriptions you don’t need, use, or want 
  • Your debt

If you’re not sure where the issue lies, it’s time to break up your expenses into: 

  1. Payments (Your living expenses, debt, and permanent expenses)
  2. Savings (Emergency savings, special savings such as weddings and property down payments)
  3. Investments (These include retirement contributions such as 401(k), Roth IRA, and traditional IRAs).
  4. Guilt-free spending (Whatever rocks your boat, baby!)

Allocating a portion of your income to guilt-free spending eliminates FOMO from your life, but if you’ve been living on a tight budget, it probably means you’ve had to sacrifice something for it. And that’s okay. Rather lose that service or subscription that you’re not even sure about, and do the things you love. I’m not saying don’t pay your student loan because you hate it, I’m saying if you’re not big on TV, why have streaming services if you’d much rather go out? Or work out? Or have your own personal library? 

The Envelope System 

This system works on the basis that your salary is cash and each category that you need to spend money on, has an envelope. On payday, you distribute the cash between the envelopes. On the next payday, if there’s any money left in any of these envelopes, you can choose to pay off debt faster, increase your savings, or buy that pair of Jimmy Choos. 

Now the envelope system doesn’t require you to use actual cash. You can use an app purpose-built for envelope budgeting to get this done. We’re all about automation here. 

The reason why this system works is that it trains you not to overspend. It also creates an opportunity where you can have fun money without your finance drill sergeant breathing down your neck to live like the Spartans. 

What if I can’t save that much? 

Ramit has some handy guides that help you wiggle free some money to save. 

Some include finding ways to increase your income, from starting a business or side hustle to asking for a raise. Ramit often says, “There is a limit to how much you can save, but there’s no limit to how much you can earn.”

Extreme changes could include moving to a cheaper house or trading in your car for a cheaper model. Bear in mind, you’re putting these changes in place so you can live your best life, not for you to wallow in silence as you eat Ramen and try to watch your neighbor’s TV from the balcony. 

Even if you’re not at the 10% mark, save 1%, then move it up to 2%, then 5%, until you’re able to put away enough to afford you a rich life. The point is to get started, build momentum, and keep going. It also helps if you start thinking of savings as an urgent way to get out of a financial hole, and not a burdensome expense. 

You can do it 

When it comes to savings, you already have the tools and know-how to get this done. It’s just a matter of automating that monthly payment to the account. Start with as much as you can afford and work your way up. Plan your time-sensitive savings goals to ensure you meet them without having to dip into credit. 

Knowing how much you can save means getting cozy with your finances and determining your personal needs. The goal is to get started. 

If you want to know more about managing your personal finances, find out how the wealthy do it with our Wealth Triggers program. 

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