How Much Should I Save Every Month

 

 

Why saving money is so critical to building a brighter future.

 

How much should you save every month?  It’s a good question.  For many people, the idea of saving even a few dollars a month may feel out of reach.  After all, if you’re on a tight budget it’s not like you can cut your rent on a whim or decide to stop eating.  Still, without a real savings plan in place, how can any effort to improve your situation have the slightest chance of success?

 

Exactly How Much Should I Save Each Month?

 

While some experts suggest you divide income up and apportion it to categories like needs, debts, wants, savings, and/or investment, it’s less important to devise a complicated formula and much more important to be doing something.  After all, if you fail to save this month, that’s 1/12 less you’ll end up saving for the year.  And if you fail to save again and again, eventually it all adds up to having nothing when you need it the most.

 

Live For The Moment Versus Developing A Financial Plan

 

If you’re still young, the idea of saving for an event far into the future can feel like an exercise in the absurd.  After all, don’t we have earthquakes, wars and all kinds of strange disease that mean we should live each day like it’s our last here on earth?  In truth, life is unpredictable and many “bad” things happen.  However, many of those same things are often overcome with the barest minimum of planning and foresight.  For example, if you saw my recent post, “The Earthquake Quiz: How Ready Are You?” it points the way toward some basic preparation to minimize the potential risks associated with earthquakes.  Yes, some will be unlucky and get hit with disaster, but at some point it’s a matter of doing what you can to protect yourself.

 

Stay Ahead Of The Game

 

Unfortunately, there are no guarantees in this crazy, mixed up world of ours.  That means disaster can rear its head without notice and knock us off our feet.  However, it also means that those who expect an occasional disaster to befall them are leaps and bounds ahead of the pack. Why?  For the simple reason plans minimize potential fallout.   This is why creating a savings fund is crucial.  Whether it’s to go to school, pay for some type of financial emergency, get married, or plan for retirement, starting with money in the bank beats the heck out of paying double or triple the cost you’ll end up paying by putting it all on a credit card and paying all that interest.

 

The Best Way To Save Is A Bullet Proof Savings Plan

 

Make sure to set yourself up to save successfully.

To make certain you save each month, do it automatically.

So how does one start saving? The first step is easy: Just make a commitment to save and then make your savings plan bulletproof.  This means making the process simple enough you never have to think about it.  One sure way to do that is to automatically put money into savings as you receive it.  If you get a regular paycheck, the best plan is to either (1) have your employer divide your funds between your checking and savings accounts with an automatic payroll deduction or (2) set up an automatic monthly transfer from your checking account to your savings account on the same day (or days) you get paid.  That way, you’ve already separated the amount you intend to save for the month.

 

Develop A Plan To Save And Another To Tap Savings

 

Now, comes the tricky part.  You have to decide under what specific circumstances you can tap into your savings.  If you tap into them every time you see something you want to buy, your effort will go nowhere.  It’s therefore important to decide what constitutes a legitimate reason to withdraw money.  Take some time to think about this.  Are you saving up for a particular thing, like a new house or retirement?  How will you handle an unexpected expense (for example. suppose your car dies and needs repairs)?  It’s a good idea to commit your decisions to paper.  You could write something like, “I plan to save $100 a month without fail with the long term goal of building a nest egg for my retirement.  I will only withdraw these funds after I’m 65, unless I have a major medical emergency.”  Of course, your plan can be much more detailed, too.  In fact, the more you can spell out the specific things you consider legitimate reasons to withdraw money from savings, the more likely your effort will succeed.  Writing goals or commitments down on paper is a proven technique for successfully following through on them.

 

Best Ways To Save: Certificates Of Deposit

 

Again, the more bulletproof you can make your savings plan the better.  That means it’s good to find ways to keep yourself from spending your accumulated nest egg on the next cool thing that comes along.  Being bulletproof might look like buying a Certificate of Deposit (or CD) every few months.  A CD or certificate of deposit is a special type of savings that banks offer that pay slightly higher interest than a regular savings account.  CD’s are meant to be held for a specific time frame (say, six months or one to several years).  Also, banks offer progressively higher interest rates for holding CD’s for longer periods, so the longer you intend to hold them the more interest you earn.  The reason CD’s make a savings plan more likely to succeed is they carry an interest penalty for early withdrawal.  As penalties are something we all want to avoid, they make it harder to yank your funds out of the bank on a whim.

 

 

Rotate Those CD’s.

 

It may go without saying, but only a portion of your savings should ever be in CD’s as you cannot predict when an emergency might happen.  You’ll want to keep sufficient funds in your regular savings to handle anything that comes up.  With this is mind, it’s a good idea to buy CD’s that mature at different times of the year.  That way you should always have enough cash available to draw on without penalty.

 

Individual Retirement Accounts (IRA’s)

 

If you’re saving for retirement, and once you feel like you have enough of a reserve to cover an emergency, start putting some of your funds in an individual retirement account or IRA as they are known.  The government provides special tax incentives to save in this way.  For complete rules on IRA’s see the IRS publication 560.  IRA’s are basically special investment vehicles designed to help you accumulate funds for your retirement.  You can own CD’s stocks, bonds, mutual or exchange traded funds, commodities and even real estate in an IRA.  There is much more to them than we can discuss here so if you want more information read the publication above or see this article on Wikipedia.  Like a CD, there are penalties for early withdrawal from an IRA, but as the term to hold them will often be years or even decades (depending on your age and when you plan to retire) they are a terrific way to insure the success of a long-term savings plan.  Again, don’t put all your savings in in IRA—be sure to keep enough of your funds in a regular savings account to handle any emergencies.

 

Develop A Discipline To Save

 

Start building your nest egg.

Savings doesn't have to involve some complicated formula.

The other part of making a savings plan bulletproof is to develop a sense of discipline.  As you start to see your savings grow, the temptation to spend it can start to build.  In order to resist the temptation, you’re going to need some serious willpower.  This isn’t always easy.  What can you do?  One way to resist is to avoid putting yourself in a situation where you’re tempted to buy.  For example, if you want a new car, but your savings were really meant to pay for your education, don’t go spend the day at a car dealership.  Another idea:  Mute all those noisy ads as you watch TV and avoid all those glossy catalogs filled with cool stuff to buy.  The less you have people telling you to buy more stuff, the better chance you’ll be able to resist.  Another method to resist buying is to talk to close friends and set up a support network.  If any of you feel an urge to buy, call someone in the network and have them talk you out of it.  To make this even more successful, organize a group of friends and start a savings club.  Have everyone set goals and contribute to a pot as you go.  As people meet those goals reward prizes.  Whatever you do, make it fun.

 

So I’m Still Not Sure How Much I Should Save Every Month

 

How much should you save every month?  I will provide some numbers the experts suggest below, but first I want to stress the real answer depends a lot on your unique situation.  Let me explain: Different people will want to save different amounts to achieve different goals.  There are also good arguments that suggest your income is a primary factor for determining your overall savings goal—the higher the income the higher the goal.  Then there are arguments that talk about age—the closer you are to retirement, the more important it is to pump up your savings, especially if you didn’t do it earlier.  Debt can also play a role.  If you’re paying as much as 25% or more on credit card interest, getting out of debt first should be your number one priority. Why? Even the best long term investments are unlikely to sustain returns in the same range.  That’s another way to say you’ll make more money paying off your debt than you would investing it in the stock market—and it’s a sure bet!

 

A Guideline

 

Okay, now for the numbers: Most financial experts suggest we ought to be saving anywhere from 10 to 20% of our income at all times (though some include paying down debt in these figures).  Also, if your closer to retirement, you may want to be saving much more than 20%.

 

Time Is Your Friend

 

If there was one message to take away from this post it would go to all those young people out there just beginning life on their own.  To them, I’d say the surest chance of accumulating a fortune is to develop a strong discipline about saving right now.  And the best part about being young is time is your greatest ally.  That means the earlier you start saving, the faster you’ll be on the road to success.

 

Making An Example Of Time

 

Let me give you an example.  Let’s say I’m a middle-aged man (believe me, that sounds better than an old guy) and I want to buy a nice new car, say one costing $30,000.  Now, if I have zero dollars in savings (but a good credit score and enough income), the chances are the only way I can buy the car is by taking out a loan.  Using this auto loan calculator at BankRate.com, if we assume an auto interest rate of 5% on a 4 year loan, my total payments will add up to $33,162, which means I’m paying an extra $3162 for that car by buying on credit.  Now, while I’m paying off the car (i.e. over the next four years), I’ll be making a $690.88 a month car payment.  In other words, without savings my monthly out of pocket will be almost $700.  That’s a lot of money every month!

 

Compound your savings.

Time is a great ally when it comes to saving money.

Now, assume you’re 22 and just getting out of college.  Say you can earn only 2% on your savings, but you want to know how much you’d have to save every month to buy a $30,000 car for cash at age 40.  That gives you 18 years to save up.  According to the BankRate.com compound savings calculator, if you could earn only 2% interest on your savings you’d need to save a little over $115 a month to meet a $30,000 savings goal.  If you could get a little better interest, say 5%, you’d need to save about $86 a month.  What sounds better?  $690 a month or $115 a month?  In other words, achieving the same goal (i.e. buying a new $30,000 car) can cost you 6 times less cash flow every month by saving up ahead of time (i.e. $690 divided by $115 = 6).  Do you see yet how time becomes your ally?

 

There’s one final aspect of this example that’s easy to overlook.  If you end up paying out $690 a month in your middle years, that’s money you won’t see in retirement.  This is why it’s so critical to start saving when you’re you’re younger.

 

Save A Cool Quarter Million

 

What would it take to save $250,000?  Is it really possible?  The answer depends on how long you have to save and how much interest you get paid.  However, let’s assume you’re 25, and you plan to put an equal amount aside for the next 40 years—that is, until your retirement at age 65.  For this example let’s assume that on average, through careful savings and a bit of diversified investing, you earn 5% a year on your money.  If we use a compounding calculator like the one at Bankrate.com, and convert years to months so we can compound our savings monthly, we have to save about $164 a month to hit our goal. Now, at 25 that may sound like a lot of money every month, but if you earn an average of $2000 a month it’s actually less than 10% of your income (i.e. $2000 times 10% is $200).  Want to save a million dollars?  Try playing with  Bankrate.com’s million dollar calculator to see what it would take.

 

Don’t Wait

 

If you take nothing else away remember this: No savings plan equals no money and probably a lot of debt down the road. You can avoid that simply by starting a savings plan today.  Even if you can only put aside a few dollars each month it’s worth knowing you’re taking steps to build a brighter future.

 

If you enjoyed this post you may also want to read: Teach Your Kids To Save

 

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