How much money should you save every month? This is a very common question. How much you save per month will depend on different factors. Such as – your monthly income and amount of expenses, your lifestyle, your financial goals, etc.
If your monthly income is much higher, you will be able to save more. And if the monthly income is less, save less. Whether it is more or less, you should save some money for your future safety or to invest in your portfolio diversification. At first try to save even 1% of your income. You will see that after a few years it has become a large amount.
But the ideal is to save 20% of your after tax income. If you make $5,000 a month, save $1,000.
Your financial goals will also play a vital role in savings. If your goal is to buy an expensive car or a luxury home, save a little more. And if the goal is to live comfortably after retirement, then save according to your needs.
How much should you save every month?
How much money you should save each month will depend on your financial goals. So before saving, you need to set financial goals of your life. Financial goals should be consistent with life goals.
Many experts recommend saving 20% of the total income per month. According to the popular 50/30/20 rule, spend 50% of your budget on basic necessities. Such as house rent, gas and electricity bills, food costs etc. Spend 30% for non-essential categories, such as restaurant meals, gyms, entertainment, outings, etc. And the remaining 20% for savings.
Suppose your after-tax income is $5,000. Then 50% of $5000 means you will spend $2500 in the basic expenses category. Spend $1,500 (30%) for discretionary expenses and save $1,000(20%).
But how much money you should save each month will depend on your income. If you are a high income earner, you can save a lot more money if you want to. For this you need to reduce the amount of cost. In particular, the amount of unnecessary expenses should be reduced.
If you are a low income earner then you can save less than 20% of your after tax-income. Because if you want to follow the 20% rule, you may have trouble meeting other expenses you need.
Savings for Emergencies
You can save money for various reasons. However, most people save for emergencies. How much money is safe for you in an emergency fund? How much money you put into the emergency fund will depend on your lifestyle, the amount of income and expenses per month, and the number of family members.
Experts say it is best if the emergency fund is between three months and six months of basic living expenses.
Three months for those whose jobs are much safer and are getting a certain amount of salary every month. And six months for those whose salary is not fixed and the job is relatively less secure.
An emergency fund is a fund whose money is used to cover unforeseen expenses. For example – if the car breaks down, when you lose your job. According to Bankrate, 39% of Americans save less than $1,000 to cover emergency expenses.
Savings for Retirement
I am saying the same thing here as I said in the case of emergency funds. How much you will save for retirement will depend on various factors, such as – your lifestyle, when you started saving, the amount of your income and how much money you have already saved.
A general rule of thumb, you can save at least 15% of your pre-tax income every year for retirement. Your employer may have some contribution in this 15%. Don’t save too much because if you save extra money you won’t be able to maintain your current lifestyle.
Another rule of thumb, if you are 30 years old, save one times your income, if you are 35, save twice your income, if you are 40, save three times your income.
If you want to save money for retirement, it will be beneficial for you if you start it in early age. The sooner you start saving, the longer you can take advantage of compound interest.
Ways to save Money
Reduce unnecessary costs
One of the ways to save money is to reduce unnecessary expenses. There are some basic expenses that we can avoid such as – housing expenses, groceries, transportation, healthcare costs, Utilities bill etc. Besides these costs, there are some expenditures that we can avoid if we wish. Such as – gifts, entertainment, travel, eating in restaurants, buying expensive electronics products, etc. So if you want to save money, try to reduce unnecessary expenses.
Reduce the use of credit cards
We all know that credit card interest rates are very high. The interest rate on most credit cards is between 20% -25%. Those with a very good credit score tend to have lower interest rates.
To save some money by reducing costs, you should reduce the use of credit cards as much as possible. Use cash money to buy products.
Buy in bulk
We need different types of products regularly. That’s why we buy few products every day.
Many of us don’t know that one of the best ways to save money is to buy more at once. Almost all retailers offer some discounts for purchasing large quantities of products. So you should not buy one or two products, if you buy but in bulk you can save some money.
Try to increase your income and invest in assets
Suppose you now make $5,000 a month. You made a personal budget to save some money after covering all the expenses properly. After creating a budget and following it, at the end of the month you saw that you were able to save $300. But if you have courage you can increase this amount from $300 to more than thousand dollars.
You can invest your extra income in stocks. Don’t worry if your extra income is very little. You can invest even with a small amount of money. There are many organizations that will give you the opportunity to invest with a small capital to diversity your portfolio and maximize your profit.
You can also contribute part of the extra income to 401 (k). This will increase your future income. Increasing income also means increasing the amount of your savings.
Make a bigger down payment
A down payment is an upfront payment that you use to buy a home, auto or any other assets.
A bigger down payment will give you relief from some extra interest. Experts say 20% down payment is ideal.
Suppose you buy a car for $20,000. Then you have to pay down $4,000 (which is 20% of the purchase price). Then your principal loan amount will be $16,000. You will have to pay interest on that amount. If you can pay more down payments then your loan amount will be less and your interest amount will be less as well. But before you buy a car; be sure to check the best auto loan rate.
Pay Off Student Loans Fast
There are several types of student loans that can help us pay for our tuition. One of the great benefits of student loans, especially federal student loans, is that you don’t have to pay interest while you are in school. Grace period of 6 months is given after completing school, after this grace period interest on the loan has to be paid.
Most students want to pay interest after concluding their studies. As a result, even after completing a school degree, the debt has to be repaid for a long time. This will reduce your savings capacity. The sooner you can repay the student loan, the sooner you can focus on savings. That’s why you need to know how to manage student loans.
Why should you save for the future?
We all know the future is an uncertain destination. We don’t know what will happen in the future. Any unforeseen events may happen in the future. The biggest unwanted event is an accident or a major illness. When faced with such a situation, you may suddenly need a slew of money at once. Then if you do not have any savings, you will not be able to cover those expenses with your current income.
It may be that the company you work for may lay off you for any reason. Then you can be in danger if you do not have savings.
Savings will assist you to live a splendid life after retirement. You don’t have to worry too much in old age for money. Savings will give you peace of mind.
Most people are saving money in banks or financial institutions thinking about the need for money in the future. In the United States alone, personal savings amount to $3.9 trillion. 69% of adult Americans have less than $1,000 in their savings.