Saving 101: How to Set Your Financial Goals and Start Saving

Anna Yen, CFA, is a financial wellness expert with two decades of experience in financial markets. This includes on the trading floors of JPMorgan and as a Director at UBS. She specializes in personal finance, derivatives, and alternative investments including crypto.

Over to Anna.

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A major part of adulting involves resisting the urge to blow your extra cash and stick it in savings instead.

Typically, experts recommend saving anywhere from 10-30% of your income. But that leaves a lot of wiggle room – and an important question: how much should you save?

As it turns out, there’s not one right answer. Cleo’s here to help you determine for yourself how much to save for big goals, by age, and more.

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How Much Should You Save for Retirement?

Most experts suggest saving 10-15% of your pre-tax income for retirement alone. If you hope to achieve millionaire status, you’ll want to top out that range – and then some.

You can save through vehicles like a 401(k), individual retirement account (IRA), and brokerage accounts. If your employer offers a 401(k) match, add that to your savings, too. (E.g., you save 7%, your employer contributes another 3%, that makes 10%!)

But don’t just go by general advice – it’s better to have a specific target in mind. Retirement calculators can help you figure out how much you’ll need in retirement based on your income and lifestyle preferences.

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How Much Should You Save for Retirement by Age?

Small savings add up to big bucks over time, and there’s no “right” way to save. Instead of setting exact numbers, investment giant Fidelity recommends setting income-based retirement savings by age, like so:

• 1x your annual salary by age 30
• 3x your annual salary by age 40
• 6x your annual salary by age 50
• 8x your annual salary by age 60
• 10x your annual salary by age 67
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This structure also gives you room to adjust your savings goals by earnings, which should rise as you gain more experience in your career.

How Much Should You Save for Emergencies?

Emergency savings should be a high priority goal for any household. Your emergency account catches you when you lose your job or run into unexpected medical or car bills.

General wisdom recommends saving at least 3-6 months’ worth of household expenses in your emergency fund. So, if you spend $2,000 a month in rent, utilities, and groceries, you’d need to save at least $6,000 to $12,000 in your emergency fund.

Don’t let that big-ass goal worry you, though. Start small – $100, $500, $1,000 – and work your way up over time. As you cross your milestones off your list, take some time to pat yourself on the back for your accomplishment and for improving financial security.

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How Much Should You Save for a House?

Many Americans hope to buy a house someday, even if the economy seems intent on crushing that dream. You can crush it right back by saving early and often, a few hundred dollars at a time.

Ideally, you should aim for 20-25% of your ideal home’s sales price. That gives you a 20% down payment, plus another 5% to cover closing costs. At 20% down, you won’t have to worry about private mortgage insurance (PMI), which is extra money that doesn’t go toward your loan.

Of course, it’s difficult to place a dollar amount on that goal. For Midwestern buyers, saving $75,000 for a $300,000 house is totally reasonable. West Coast buyers might need that whole $300,000 for the down payment alone.

However, if you don’t want to wait, you might be able to put anywhere from 0% to 10% on a home. Just be prepared to pay extra in PMI.

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How much should you save overall?

As a broad rule, experts recommend saving at least 15-20% of your gross, or pre-tax, paycheck each month. That includes 10-15% for retirement savings, plus 5-10% toward your emergency savings, down payment savings, and more.

But again, that’s just general advice. Later, we’ll look at how to set concrete goals and jiggle your budget and savings to fit your needs.

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How Much Should You Save Each Month?

Again, how much you save monthly varies by goals and budgeting strategy.

One common strategy is the 50/30/20 method, which allocates 50% of your paycheck to necessities, 30% to wants, and 20% to your savings.

The beauty of this strategy is you can easily wiggle it to fit your needs, such as saving 30% and spending 20%. You can also allocate your paycheck less specifically: say, 80% for all spending plus 20% for savings.

Bear in mind that if finances are tight, it’s okay to save what you can afford and step up as your income grows. What matters is that you’re saving at all – even just $25 a week.

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How Much Should You Save Each Paycheck?

It’s wise to save each paycheck to keep your contributions relatively consistent. How much you set aside depends on your total savings goals and payment schedule.

Say you’re paid $2,000 (pre-tax) every two weeks and aim to save 20%. Ideally, you’d save at least $400 from each paycheck. But if you’re paid $4,000 once per month, you’d set aside at least $800 per paycheck.

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How to Set Financial Goals You Can Meet

We’ve looked at three of the most important and common savings goals you’ll likely run into, but those aren’t the only ones you’ll ever set. Here’s how to fit every goal into your lifestyle, no matter what they are.

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Decide What’s Important to You

First up, decide what your goals are. Maybe you want to take an annual vacation, buy a new car in five years, or pay cash instead of credit for this year’s holiday presents. Prepare to stay flexible, but have a series of short-term and long-term goals in mind to kickstart your savings strategy.

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Don’t Leave the Price Tag Blank

Now that you’ve got end-game purchases in mind, assign them a price tag. For shorter-term goals, you can set a rough range based on current prices, plus a little cushion. Longer-term goals, like retirement or buying a house, may require a calculator to consider the impact of inflation and any investment or interest income on your savings.

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Set a Timeline

Having a timeline in mind helps you know how long you have to save, which makes calculating your monthly savings contributions easier. Plus, having a timeline in place gives you a concrete date to look forward to, which can help keep you on track.  

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Fit Your Goals into Your Budget

Now it’s time to make your goals work with your budget. You’ll have to do some math again, starting with figuring out your monthly income and expenses. The leftover change is what you have available to put toward your goals.

If you feel like your goals make your budget too tight or your finances change, you can always:

• Alter your timeline
• Slash your expenses
• Choose new goals that make sense for your lifestyle

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Capitalize on Compound Interest

Meeting your savings goals is easier when your money works for you on the sidelines.

Short-term savings should be protected in an FDIC or NCUA-insured account, like a high-yield savings or CD account.

Longer-term goals, like buying a house in 15 years or saving for retirement, require extra buying power. That’s where investing comes in, allowing your money to earn interest, dividends, and generally appreciate over time. When you move within 5-ish years of your goal, you can switch from an investment to cash account to protect your hard-earned (and hardworking) money.

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Cleo’s Budgeting Tools Can Help You Save

Budgeting for your goals by hand is time-consuming and, frankly, unnecessary in the modern age. Paper and pencil and spreadsheets are so last decade.

Cleo can make your financial life simpler. With Cleo, you can track your income and expenses, set a budget, and enjoy our AI roasting you all the way to success.

Sometimes, you just need the sh*t kicked out of your sails by an irreverent bot.
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Big love. Cleo 💙