How Much Money Should You Save Every Month?

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Once you’ve committed to saving, the next natural question is just how much should you save each month? After all, it’s tough to meet your goal if you don’t start by defining that goal.

There are a couple of reasonably common answers to this question.  But, honestly, I’m not a huge fan of them.  Still, I’ll cover them briefly to be comprehensive, and then move on to how I actually think about the question of how much money to save every month.

50/30/20 Rule: Useful Or Impractical?

The 50/30/20 Rule states that you should spend 50% of your income on your “needs”, 30% of your income on your “wants”, and that 20% of your income should be saved.

On the face of it, this seems like an ok rule of thumb.  But, here is the first issue.  What if you sit down to do your budget and find that your “needs” consume 60% of your income instead of 50%?

Are you going to make dramatic changes in your life to conform to the rule?  Move homes?  Sell your car?  Cancel the Internet?  Stop using water and electricity?  Personally, I wouldn’t and I don’t think it’s necessary either.

The other issue is that I don’t think saving 20% of your income is a reasonable target to apply universally.  Depending on your level of income and your lifestyle, this might or might not be appropriate.

A single person earning $500k per year might have no trouble hitting a 20% savings rate.  But, what about the sole breadwinner of a household earning $100k per year and supporting a family of four?

The reality is that different people will be able to achieve different savings rates.

The 4% Rule

The 4% Rule is another common rule of thumb to consider when thinking about how much you should save.  Basically, this rule states that you should be able to withdraw 4% of the balance of your savings every year and live on this indefinitely.

In other words, if you believe you can support yourself on $200k per year, then you will have reached financial independence once you have saved $5 million (since $200k is 4% of $5 million).

The theory goes that if you want to figure out how much money you should save each month, then all you have to do is figure out how many more years you plan to work.  Then consider what level of income you will need in order to support yourself, and multiply this number by 25 to determine your target savings balance.

Armed with this, you can calculate what your monthly savings rate needs to be, while remembering to factor in expected investment gains.

I think this is a very reasonable exercise to go through.  My only issue is that it’s a little overly complicated.  It also requires you to know what your income is going to be each year between now and retirement so that you can come up with a savings rate for each year.

Oh, and also there are variables like investment returns and inflation that might throw a monkey wrench into your plans.

Mindset: Making Saving Fun

Rather than following rules that can make saving feel like a daunting chore, I prefer to make it feel more like a game.

People always talk about what a great feeling financial independence will be.  But, I actually think it can be a good idea to change your mindset a little.

Instead of looking at financial independence as an end goal that you should strive to reach, why not look at saving as a journey?

Lofty Goals Vs. Tracking Progress

Let’s say you set a goal of saving $5 million before retirement, but right now you only have $200k in the bank.  Well, your goal is going to feel really far away, and it will probably take years and years for you to feel like you’re making good progress.

Sure, with a lot of discipline and patience, you might get there some day.  But, I doubt it will be a fun rewarding journey.

Instead, I would look at what you’ve already accomplished and then start tracking your account balance.  Make a point at the end of every month to record your total savings and investment balance.  Some months you’ll have pretty big gains, other months you’ll see dips due to market fluctuations.  Over time though, your account balance will be headed in one direction, and it’s up.

You might be surprised to find that the very act of recording your account balances will probably result in you making all sorts of decisions to save more because you’ll know that every extra dollar that you save will lead to a higher amount at the end of the month.

Growing Your Assets: A Game You Can Win

Building your savings is a fun game to play because you’ll have the wind at your back.  Markets go up and down day to day, but your investments should generally earn a nice positive return over time.  So, in addition to whatever you save each month, you’ve also got investment returns adding to your principal over time.

In fact, your investment gains will likely end up being larger than your savings contributions in most years as your investment account grows.

Saving this way is much more likely to leave you feeling great because in this game, you’ll continue to make progress each month and each year.

Ok, So Just How Much Should You Save Every Month?

The answer is going to be different for everyone.  But, the first thing that I would do is track your expenses for a month or two.  That way, you at least have a good sense for what you’re spending now and what you’re saving.

If you’re saving 20% or more already, then great.  Keep doing it, and you’ll probably be in good shape.

Setting Goals And Beating Them

If you’re saving less than 20% currently, then try to make a realistic budget that allows you to save at least 5% and ideally 10%+ each month.  Once you have this percentage, make it the absolute minimum that you save each month, and then make a game out of it.

Let’s say that you make $120k per year after taxes and you want to save 10% each month.  That means you should be saving $12k per year or $1k per month.

Open a spreadsheet or get a piece of paper and in the first column, write down the months of the year (January, February, etc.).

In the second column, write down your monthly savings goal.  In this example, you would write down $1k each month.

In the third column, write down the actual amount that you ended up saving as the months go by.  Make it a really high priority to always save at least $1k per month, and hopefully in some months you’ll end up saving a lot more.

Finally, in the fourth column, record your account balance at the end of every month.

By setting realistic goals, you’re likely to be able to achieve them and even exceed them.  That in turn should make saving more of an enjoyable journey, and less of a chore.  Guess what, if you really end up enjoying it, you’ll probably end up doing more of it.

Save More When Building An Emergency Fund

As mentioned above, I think that in general it makes sense to set realistic goals that you can sustain over the long term.

That said, if you haven’t yet built an emergency fund, I do think it’s worth sprinting for a few months to lay a solid financial foundation.  So, consider some extra belt tightening on a temporary basis in the beginning to jump start your progress.

Upgrade Your Lifestyle Slowly, And Increase Your Savings Rate

As you make more money, there is a natural inclination to spend more money.  It’s human nature, and I’m not one to tell you to fight it.  The key though is to increase your spending at a slower rate than your income.

For example, let’s say you’re making $100k a year after taxes and saving 10%.  That means you’re spending $90k per year.

If a few years down the road, you’re making $150k a year after taxes, try increasing your saving rate to 15%.  Now, you’re saving $22.5k per year instead of $10k, so you’ve more than doubled the dollar amount that you’re saving.  But, you’re also spending $127.5k each year.  So, you’re getting to enjoy your higher income too.

A Budgeting Trap To Avoid

The biggest mistake that I see people making when putting together a budget is that they are overly ambitious with their goals.  There is nothing wrong with being ambitious of course.  But, if you make your budget too difficult, you’ll soon find that you’re not happy and you’re much more likely to give up altogether.

Believe me, you’ll feel a lot better about setting a goal that you can meet every month, than setting a goal that always leaves you feeling like you’re falling short.

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