A Simple Approach
Aside from “how the hell did I get here?”, one question that pops up frequently in personal finance discussions is "how much should I save each month?"
While there isn't a one-size-fits-all answer to this question, there's a simple formula that can help you figure it out.
And that formula is…
The 50/30/20 Rule: A Starting Point
A common starting point when considering "how much should I save?" is the 50/30/20 rule. 50% of your income should be dedicated to needs, 30% to wants (those treasured brunch dates), and 20% to savings. However, like most things, it's not a one-size-fits-all solution. Its effectiveness depends on your own circumstances, including income, financial goals, and your current financial situation.
Needs: The Essential Expenses (50%)
Consuming half of our income, these are the bare essentials, the non-negotiable components of our lives, and include expenses like rent or mortgage payments, utility bills, groceries, transportation, and healthcare.
Basically, all the boring stuff.
Apart from groceries. We love food. 🍝
Wants: The Luxuries of Life (30%)
Next are wants (the best part).
These are non-essential purchases or experiences that enhance quality of life (like mimosas) but are not crucial for survival (although, after a tough week at work they kinda are).
Try to stick with your 30% budget so you can save as much as possible. 💖
Savings: The Future Is Now (20%)
Finally, we've come to the final and possibly most crucial slice of our financial pie. At least 20% of your after-tax income should be dedicated to savings. This slice is your time machine, the golden bridge to your future dreams like a cozy retirement, a down payment on a house, or that round-the-world trip you've always fantasized about.
This is your financial safety net, your emergency fund, and a crucial element in reaching your money goals.
Factors Influencing the Savings Formula
While the 50/30/20 rule provides a basic guideline, several factors can influence the ideal saving rate. These include individual income levels, financial goals, age, debt, and lifestyle. Therefore, "how much should I save each month?" will have different answers for different individuals.
For example, individuals with higher income levels might be able to save more than 20%, while those with lower incomes or higher debt may struggle to save the suggested amount. Similarly, younger individuals with fewer financial obligations might have more flexibility to save compared to those supporting a family.
Adjusting the Formula
This formula isn't set in stone. Depending on your financial situation and goals, you may need to adjust the percentages. For example, if you're heavily in debt or have little to no savings, you might be wondering, "how much should I save?" In such cases, it might be a good idea to save more than 20% of your income and cut back on your wants.
On the other hand, if you're comfortably meeting your savings goals and have a healthy emergency fund, your question might be "how much should I save now?" You might choose to allocate less than 20% towards savings and more towards wants or needs.
Budgeting Helps You Save
Creating a budget is crucial for getting you well on your way to reaching your financial goals. And with Cleo, you can create your very own personalized budget so you can save in a way that suits you.
She's an AI assistant to help keep you on top of your financial goals, in a big sis energy kinda way. 💖
It's pretty easy to get started.
1.) Get connected 🤝 – Download Cleo, sign up, and connect your checking account.
2.) Income 💸 – Select your latest paycheck(s) so Cleo knows when you get paid
3.) Bills 👀 – Add your bills and double-check to see if they’re right so they can be tracked correctly
4.) Spend limit 🥡 – Set a realistic spend limit
She'll show you how much money you’ve got coming in and how much money you’ve got going out so you can start saving those dimes. She'll also alert you when your bills are due and how much you’re spending on certain categories including:
- Bank charges
For more tips, here's How to Make a Budget With Cleo.
Balancing Today's Needs with Future Goals
There isn't a definitive answer to "how much should I save each month?" because everyone's financial situation and goals are different. However, the 50/30/20 rule is a good starting point. It's flexible and can be adjusted to meet your needs.
The key is to regularly review your budget and savings plan, make adjustments as necessary, and always make sure you're saving enough to secure your financial future.
Remember, every decision about saving today will have an impact on your future financial health. So when you're next wondering "how much should I save?", consider both present realities and future money goals. With the right balance, you can master the art of savings and secure a financial future. 🏘️
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Big love. Cleo💙