We wish we could give one number and be done with it. But the reality is there is no simple answer to how much cash you should save each month.
For some of us, saving $150 a month could be a stretch and others of us may be able to easily sock away more than $1,500 each month between retirement and cash savings.
However, if you like rules of thumb, you might work with the 50-30-20 rule that says 50% of your income goes to essential costs (housing, food, health), 30% to extra costs (clothing, entertainment, hobbies), and 20% goes to savings, divided up between retirement and cash.
Of course, no one knows your finances like you, so rather than just lean into a prescribed answer about a dollar amount or a percentage, here are a few things to consider as you’re thinking about how much you should save each month.
Make it automatic
No matter how much you save—or where you do it—the key thing is to make it automatic. The reason is that once money is in your checking or spending account, inertia is likely to set in. The chances of you spending that money, rather than pushing it into savings, are much higher.
At Varo, we recently launched an automatic savings tool called Save Your Pay. You can use it to automatically transfer a percentage of each direct deposit you receive into your Varo Savings Account. With this tool, your money goes straight to savings before you have a chance to spend it on something else.
For example, let’s say you have all or part of your bi-monthly paycheck for $2,500 set up to direct deposit to your Varo Bank Account. Use Save Your Pay to divert a percentage of that income—for example, 10% or $250—directly into your Varo Savings Account every time you get paid. You don’t have to do a thing—and your savings will grow.
Start small with a little cash buffer
Financial experts often recommend building up an emergency fund with three to six months’ worth of expenses.
But that may not match many people’s realities—almost half of American households don’t even have $400 for emergency expenses, according to data from the Federal Reserve.
So if you’re just getting started with savings, rather than set a sky-high figure that could be too daunting to tackle, you could start by saving up $1,000 or $2,000. It’s an achievable goal and enough to help cover an unexpected expense or save for something fun like a small vacation.
Retirement savings vs cash savings
After you have a small stash of cash set aside, look at your bigger plans for the future.
For some, “savings” refers to the money (usually cash) set aside for short- or medium-term expenses, while retirement contributions are usually set aside in tax-advantaged investment accounts.
This strategy of having both kinds of savings lets you build up a long-term nest egg and focus on shorter-term goals at the same time.
For workers who have access to an employer-sponsored account, such as a 401(k) or 403b, you can set your contributions to be taken out of your paycheck so it never even hits your bank account. The most important thing to know is that the earlier you start contributing—for example, with your first job in your 20s—the longer your money will be invested and the more you will make over time.
Typically your contribution is a percentage (e.g., 5-10%) of your pre-tax income and in some cases, an employer will automatically enroll you in a plan and match your contributions. If you have a question about your employer-sponsored retirement plan, talk to your benefits department.
Whether or not you have access to a retirement account through an employer, you may also be able to save for retirement using a Roth or Traditional IRA. You could set up automatic transfers or manually transfer money into an IRA even if you don’t have direct deposit.
Of course, there is much more to learn about when it comes to strategizing for retirement however the bottom line is that ideally, you’re saving in both a retirement account and a cash savings account if you’re building an emergency fund.
If you’re saving between 5-10% of your income in a retirement account can you also save 5-10% of your income in a savings account? Or how much would it take to get your emergency cash fund full?
Fixed amount vs a percentage each month
When you’re trying to determine how much to contribute to retirement or cash savings accounts each payday, you may be able to choose a fixed dollar amount or a percentage of your income.
Using a fixed-dollar amount, such as transferring $250 into a cash savings account each month, could work for some—particularly if you have a steady income. However, if you’re a freelancer, for example, and your income tends to rise and fall throughout the year, using a percentage might make more sense.
If your income is irregular, saving with the percentage method won’t impact your cash flow as much. On the other hand, if you have a high-income period, you’ll automatically be putting aside more savings, which could help during future low-income weeks or months. Varo’s Save Your Pay uses a percentage method.
Now that you have a little more information about how to think about your savings, take a moment to set things up and put your savings on automatic. These items above should help you answer the question: how much should I save each month?
Louis DeNicola is a freelance personal finance writer and credit enthusiast. You can find him on Twitter @is_lou.
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