You know you should be saving, but bills, expenses, student loans, health insurance, and Netflix and DoorDash get in the way. Much like working out, putting money into savings is easier said than done.
A 2018 Varo survey showed that about one in 5 Americans is living paycheck to paycheck. More than two-thirds don’t have a three-month emergency fund, and almost half don’t have any savings set aside for unexpected expenses.
Whether you’ve recently had to dip into your savings due to a crisis or you’re just getting started with savings, here’s what you need to know about how much you really should have in your savings account — and tips for getting there.
How much you should have in savings
When we talk about savings, we’re usually talking about saving for emergencies, short-term goals, and then retirement.
An emergency fund is the money you’ve set aside for life’s unexpected events — a medical catastrophe, a job loss, car repairs. A general rule of thumb is to keep enough money to cover three to six months’ worth of living expenses in an emergency fund. Essential expenses include your rent or mortgage payment, car payments, utility bills, health care, and food.
Instead of saving money, many people count on credit cards for emergencies. But most credit cards charge double-digit interest rates, and a second or third emergency may send your finances out of control.
If you’re just getting started with an emergency fund, set of goal of building a small fund of around $500 to $1,000 — just enough so you’re not living paycheck to paycheck.
Short-term savings goals may look like starting to save in March for holiday shopping next December, or it’s saving to buy a car or make a down payment on a house. This money is different from your emergency fund because you are definitely planning to spend it once you meet your goal—while your emergency fund just sits on the side for “just in case.”
The amount you should save for retirement depends on a variety of factors, including your age, your income, when you started saving, your planned retirement age, and your dreams for retirement.
A good rule of thumb is to save at least 15% of your before-tax income every month for retirement. Your employer match, if you have one, counts. And thanks to compound interest, the sooner you start saving, the better.
But what about debt?
If you have debt hanging over your head, it can be daunting to think about saving at the same time. It’s not easy to put $100 in your emergency fund each month when you have a 25% interest rate on your credit card.
But if you only focus on paying your debt, then you’ll have nothing but your credit cards to fall back on if you have a financial emergency. At the same time, if you reduce the balance you own on credit cards with high-interest rates, the less money you’ll throw away on interest, which can give you some extra dollars to put toward savings.
Ultimately, try to find a balance between the amount you spend on debt and savings each month. You might pay more interest than you should, but having savings to cover sudden, unexpected expenses will keep you out of the debt cycle and give you a little peace of mind.
So if you cringe every time you check the balance of your savings account, here are some tips for reaching your savings goals.
Tips for how to reach your savings goals
1. Open a high-yield savings account
Savings accounts are the most common type of bank account to set aside money for an emergency fund. Keeping your money in a savings account, as opposed to a checking account, keeps it out of sight, which means you are much less likely to spend it. If you keep in a high-yield savings account, you can save money even faster.
High-yield savings accounts offer annual percentage yields, or APYs, that are significantly higher than the national average of 0.09%. So, for example, if you have $5,000 in a savings account that earns the average interest rate, you’ll make about five bucks every year. But if you keep that money in a savings account with 2.00% APY, you would earn $100.
2. Pay yourself first
If you want to boost your savings account, consider adopting the investor mentality of paying yourself first. This means that — rather than trying to save the money that’s left at the end of the month — you set aside a portion of your income for your emergency fund or another savings account first. Routing a specified savings contribution from each paycheck into your savings account removes the temptation to spend the funds on expenses other than savings.
3. Set it and forget it
To make paying yourself first even easier, set a monthly savings goal, and automatically transfer funds to your savings account each time you get paid.
If your employer offers a 401(k) plan, you can automate your retirement savings, too. And if your employer offers a 401(k) with a match on your contributions, try to invest at least up to the match. That’s free money! Consider increasing your savings rate by 1 percent every year until you reach at least 15 percent of your pay.
4. Get better benefits
If you’re on the hunt for a new job, give preference to employers who offer good benefits, such as health insurance, matching retirement savings plans, and transportation reimbursement or childcare perks. The less you have to pay for these, the more money you have to save.
5. Start a side hustle
Have some downtime? Start a side hustle. There are lots of ways to make extra money in your spare time, from becoming a dog walker or sitter to renting out your parking space or car. The more money you earn, the more you’ll have available to sock away.
Maximizing your savings doesn’t happen overnight. But if you focus on the fundamentals, pay off your high-interest debt, automate your savings and investments, and raise your income, you can build your wealth.
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