How Much Money Should You Save Each Month?

How much money should you save each month? If you’ve never been a regular saver in the past, it’s a question you may be asking yourself. The answer, and the strategy for getting there, will be different for everyone. That’s because we all have different life and savings goals. There are other factors also at play – such as your time horizon and risk tolerance.

This article explores two of the most common savings strategies. The one you choose will depend upon how much you need to save and how quickly you want to do it.

Table of Contents
  1. Set Up Your Savings Goals
    1. Short-Term Savings Goals
    2. Medium-Term Savings Goals
    3. Long-Term Saving Goals
  2. Include Debt Reduction In Your Savings Plan
  3. Adding it All Together
  4. How Much Money Should You Save Each Month to Reach Your Goals?
    1. The Residual Method
    2. Pay Yourself First
    3. The 50-30-20 Strategy
  5. Tips to Keep Your Savings Strategy on Track
  6. Bottom Line

Set Up Your Savings Goals

Saving money to save money can seem pointless; it’s why so many people fail to start. (Late in 2019, GoBankingRates reported 69% of Americans have less than $1,000 in savings, including 45% who have none at all!)

The best strategy is to step up specific savings goals. Know what it is you’re saving for. Having a plan will make the savings effort real and make the math of saving money much more straightforward. Once you know how much you need to save, it’s just a matter of developing the method to get you there.

Below are four of the most basic savings goals. You can try to accomplish all simultaneously or start with one, then add more as you gain momentum.

Short-Term Savings Goals

This category can include goals you will need to meet in less than one year. 

The most obvious example is an emergency fund. It’s an account to have available to cover unexpected expenses, like out-of-pocket medical costs, major car repairs, or even as a source of cash flow after a job loss.

There’s no way to know how much to have in an emergency fund. Mostly, it’s just an allowance to have available for expenses that you can’t precisely plan for. 

Most financial planners recommend having sufficient funds to cover three- and six-month living expenses. For example, if your costs are $3,000 per month, your emergency fund should hold between $9,000 and $18,000.

Other short-term savings goals can include saving for an upcoming vacation or the down payment on a new car.

Since you will need the funds in the near term, you should hold them a safe investment. The best option is to open a high-yield savings account so you can earn at least some interest on your savings.

Medium-Term Savings Goals

Medium-term savings goals are spending events expected to occur in more than one year but less than five or 10. Examples can include saving money for the down payment on a house, a wedding, or even college expenses for a child expected to occur within the next few years.

The primary reason for establishing medium-term savings goals is so that you avoid tapping short-term savings, which may leave you exposed to emergencies.

Long-Term Saving Goals

The most obvious long-term savings goal is retirement. For most people, that’s at least ten years in the future – for young adults, it may be 40 years or more.

Because retirement savings involve long terms, the emphasis needs to be on investing for higher returns rather than saving for safety. That will give you the benefit of growth from a combination of regular contributions and investment earnings.

There are lots of ways to save for retirement. Though employer-sponsored retirement plans, like 401(k) plans, are common, individual plans are also available. These include traditional and Roth IRAs, solo 401(k) plans, and SEP and SIMPLE IRAs.

If you have an individual plan, there are plenty of investment options. If you like self-directed investing, you can choose an investment brokerage, like Ally Invest. If you prefer a managed option, you can take advantage of low-cost, automated investment services like Betterment and Wealthfront

And if you prefer to choose your investments but want to take advantage of automated management of your plan, M1 Finance is an excellent choice. You can select the stocks and funds held in your portfolio, and M1 will manage it free of charge. 

Include Debt Reduction In Your Savings Plan

This category may be a bit of a surprise, but debt reduction is a form of savings because lowering debt increases net worth. It has the same effect as savings, except that rather than increasing your assets, it decreases your liabilities.

From a savings standpoint, you may want to establish a plan to pay off credit card debts or a car loan, or even eventually to put your mortgage to bed forever.

One significant advantage with debt reduction is that once you pay a debt in full, it leaves you with more money each month to contribute to other savings goals. That’s another reason why you should make debt reduction part of your savings plan. 

Adding it All Together

For many who are new to saving, it may be best to approach your savings goals one at a time. The logical place to start is with short-term goals, especially an emergency fund, because it will give you the financial breathing room to make it easier to take on larger savings goals.

At the same time, it also helps to begin a retirement plan as soon as possible – even while you are building an emergency fund. Since retirement savings involve growth, getting that process started as quickly as possible is essential.

You can start by making small contributions from your payroll into your employer plan or even an individual plan. Even if you start with just 2% or 3% of your pay, it will get you started on long-term savings.

Medium-term savings goals and debt reduction may be the most difficult to fit into the mix. But if the result is something you want, you’ll have all the motivation you need to get the ball rolling. Once again, the best strategy is to start small and build up your contributions over time.

How Much Money Should You Save Each Month to Reach Your Goals?

There are many different ways to develop a workable savings strategy. For example, you can choose to save a fixed percentage of your income, a flat dollar amount, or even dedicate money from a side hustle entirely to savings.

But below are two of the most common savings strategies. One is more casual, while the other requires a big helping of discipline. (Guess which one is better?)

The Residual Method

This is the default strategy for saving money. It’s how most people save. Pay all of your expenses, then save whatever remains at the end of the month. Not very scientific!

A modified version of the residual method is to set of fixed monthly savings target. For example, if you’ve established a definite goal, you can set a flat amount to save each month. You may decide that, based on your income and expenses, you’re able to save $500 per month or even more. You’ll then adjust your costs to accommodate the savings allowance.

This method can work if you have a natural orientation toward living beneath your means. But if you’ve made savings goals that you’ve been unable to reach in the past, you’ll need a more structured approach.

Pay Yourself First

The Pay Yourself First strategy is the more logical reverse of the Residual Method. Rather than leaving your savings to chance, you “pay yourself first” by saving money when you are paid and then make the expenses fit into what you have left.

If you want to save $500 a month, save that from your paycheck and only spend what is left. If you run out of money, you can’t spend anymore and you guarantee your savings are safe.

The 50-30-20 Strategy

The 50-30-20 savings strategy (sometimes called the 20-30-50 budgeting ratio) has gained popularity in recent years because of its simplicity. It’s a more disciplined approach since it builds savings into your budget. It does this by assigning specific percentages of your net income to three broad expense categories:

  1. Necessary living expenses: 50%
  2. Discretionary spending: 30%
  3. Savings: 20%

Necessary living expenses are considered fixed expenses, like payments for your house, car, credit cards, and other debt payments. Discretionary spending, on the other hand, is more variable. These include groceries, utilities, insurance, repairs, dining, entertainment, and travel.

One of the advantages of this strategy is that you’re not limited to the specific percentages given. If you have enough extra room in your budget, you can swap out 30% for savings in exchange for 20% for discretionary spending. You can also start out using the 50-30-20 breakdown but increase the savings percentage as you go forward.

Unless you’re a natural saver, you’ll probably need to set up a formal budget. Don’t worry if you have never had a budget before. You can use inexpensive budgeting apps for this purpose, like YNAB (short for You Need A Budget).

A budgeting system helps you visualize your budget, making it easier to see exactly where your money is going and what adjustments you need to make.

Though you should strive to maintain your monthly spending targets, don’t worry if you miss the mark a month or two.

Think of 50-30-20 as a longer-term strategy, in which you may save less in some months but more in others. The most crucial factor is to make sure you’re on track over an entire year and every year after that.

Tips to Keep Your Savings Strategy on Track

Here are some strategies you can use that will make saving money easier:

Start small. Starting small will make the process easier if you’re new to saving money. Even $100 or $200 per month can be the kickstart you need. You can increase your contributions with salary increases, cash windfalls, and by reducing your expenses. 

Automate your savings. Payroll savings contributions are a good strategy when saving for an employer-sponsored retirement plan. You can use the same method to fund an IRA, another individual retirement plan, or make regular contributions to your savings account. Automating your savings will save both time and effort. 

Track your progress regularly. If you’ve established savings goals, it makes sense to track your progress along the way. This is especially true with fixed savings goals, like an emergency fund or a house downpayment. Not only will tracking let you know how close you are to reaching those goals, but it will prevent you from over-funding one savings goal at the expense of another.

Have an accountability partner. If saving money is new to you, consider an accountability partner. You can share your goals and strategies with your accountability partner. Make sure you choose someone you trust and are interested in helping you achieve your savings goals.

Reward yourself when you reach specific goals. Saving money can get boring, so it helps to make it fun. As you set goals, reward yourself when you achieve them. For example, you could go out for dinner after filling your emergency fund.

Bottom Line

Saving money can be challenging if you’re just, well – saving money. But by setting up goals and creating workable strategies to reach them, you’ll not only make it real, but you’ll also be providing yourself with the framework to turn your plans into reality.

Accumulating savings is the foundation of financial security and, ultimately, financial independence. The sooner you get started, the faster you’ll reach your goals. With every goal you achieve, the next will be that much easier.

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About Kevin Mercadante

Since 2009, Kevin Mercadante has been sharing his journey from a washed-up mortgage loan officer emerging from the Financial Meltdown as a contract/self-employed "slash worker" – accountant/blogger/freelance blog writer – on He offers career strategies, from dealing with under-employment to transitioning into self-employment, and provides "Alt-retirement strategies" for the vast majority who won’t retire to the beach as millionaires.

He also frequently discusses the big-picture trends that are putting the squeeze on the bottom 90%, offering workarounds and expense cutting tips to help readers carve out more money to save in their budgets – a.k.a., breaking the "savings barrier" and transitioning from debtor to saver.

Kevin has a B.S. in Accounting and Finance from Montclair State University.

Opinions expressed here are the author's alone, not those of any bank or financial institution. This content has not been reviewed, approved or otherwise endorsed by any of these entities.

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