Saving money is maybe the most important factor in getting control of your finances. It’s how you stop living paycheck to paycheck. It’s the motivation behind skipping that Starbucks and cutting down on your weekly Ubers. And when you achieve your savings goals, it’s the ultimate reward for your hard work.
Whether you're looking to build an emergency fund, save for a down payment on a home, or save for retirement, determining how much you should save can be a daunting task. However, finding your savings sweet spot doesn't have to be a challenge. Financial freedom is all about creating a system that works for you, so you don’t even notice it running.
In this blog post, we'll discuss how to determine how much you should save and provide some tips on how to get started.
How much should I save? 5 steps to finding your savings flow
1. Set Your Financial Goals
The first step in determining how much you should save is to establish your financial goals. What do you want to save for? Do you want to build an emergency fund? Do you want to save for a down payment on a home? Do you want to save for retirement?
If you’re a dream board girlie, now is your time to shine. If not, that’s cool too. Just think about your top savings priority. If having more than one goal is too overwhelming, pick one, and start with that. Setting your goal is super important because it’s your motivation for putting money aside each month, delaying the gratification of spending it straight away.
Once you have established your goal or goals, you can then determine how much you should save.
For example, if you want to build an emergency fund, you should save at least three to six months of living expenses. If you want to save for a down payment on a home, you should aim to save at least 20% of the purchase price.
So you have the goal. Now you can make a plan for achieving it.
2. Calculate Your Expenses
The next step in determining how much you should save is to calculate your expenses. This will help you understand how much money you need to live on and how much money you can save. You could start by tracking your expenses for a month or two. This will give you a good idea of how much you spend on essentials like housing, utilities, and groceries, as well as non-essential spending like entertainment and dining out.
Or, you could use an app like Cleo to do the tracking for you. Once you download Cleo for free and connect Cleo to your main bank account, our super smart AI will sort your expenses into essential and non-essential. You can then go back and tweak the categories.
Once you have a good idea of your essential monthly expenses, subtract this amount from your monthly income. The difference is how much you could save each month. If you find that you don't have any money left over to save, it may be time to re-evaluate your non-essential expenses and find ways to cut back.
Luckily, you can make this easy by having Cleo set spend limits for you, and remind you when you’re about to hit one.
3. Determine Your Savings Rate
Now that you know how much you can save each month, it's time to determine your savings rate. Your savings rate is the percentage of your income that you save each month. A good rule of thumb is to save at least 20% of your income. However, if you're just starting out, you may need to start with a smaller savings rate and work your way up.
To determine your savings rate, divide the amount you can save each month by your monthly income. For example, if you can save $500 each month and your monthly income is $3,000, your savings rate would be 16.7%.
4. Choose a Savings Pot
Once you know how much you should save and your savings rate, it's time to choose a savings vehicle. There are several options available, including savings accounts, Certificates of Deposit (CDs), and investment accounts.
We’re not financial advisors, so you’ll wanna do your own research to find the best option for you, but here’s a little information on each.
- Savings accounts are a safe and secure option for short-term savings goals. They offer low interest rates but are FDIC insured, which means your money is protected.
- CDs are also a safe and secure option for short-term savings goals. They offer higher interest rates than savings accounts but require you to lock up your money for a set period of time.
- Investment accounts are a good option for long-term savings goals like retirement. They offer higher potential returns than savings accounts and CDs, but come with more risk.
5. Automate Your Savings
Ok, this one is important, because it allows you to save without thinking about it. Instead of having a choice between spending or saving, automatic savings takes this choice away. So you can just watch your savings build month on month.
This means setting up automatic transfers from your checking account to your savings account or investment account. Orrrrrrrrr, you could let Cleo do it for you.
With Autosave, Cleo automatically stashes small amounts away for you each week so you don't even have to think about it. Then before you know it, you have hundreds saved up in your Cleo Wallet 💰
Cleo offers four different savehacks to help you save:
- Set & Forget: Pick an amount up to $24 and Cleo will set it aside each week for you
- Round Up: Cleo rounds up and sets aside the change from your spends each week
- Smart Save: Cleo uses ✨ magical algorithms ✨ to set aside money each week
- Swear Jar: Get "fined" when you spend at selected retailers (the fine goes into your Cleo Wallet each week)
To get started just type "autosave" to Cleo in the app.
How much should I save? The summary
Determining how much you should save can be a challenge, but it's an important part of financial planning. Start by establishing your financial goals, calculating your expenses, determining your savings rate, choosing a savings vehicle, and automating your savings. By following these steps, you'll be on your way to finding your savings sweet spot.
It's important to remember that everyone's financial situation is unique, and what works for one person may not work for another. Be sure to evaluate your financial goals and circumstances and adjust your savings plan accordingly.
Additionally, it's important to have patience and be consistent with your savings. Saving money takes time and effort, but it's worth it in the long run. Start small and work your way up as your financial situation improves.
There’s only one thing left to do…
Enjoy this post? Give it a share or send it along to a friend. You never know, it could make a big difference. Big love. Cleo 💙