When someone asks how much money they sh ...

When someone asks how much money they should save each month, I throw them a curveball rep

Feb 01, 2022

"What are your savings goals?"

That's a serious question. Your ideal savings rate depends on your specific, long-term reasons for saving.

There are three timelines you should consider:

Less than 1 year

Your short-term savings can get used to vacation in Aruba, buy holiday gifts or pay your taxes.

Less than 1 decade

You might use this money to replace your dishwasher, fix your car's timing belt, cover a major insurance deductible, stay afloat when you're between jobs and make a down payment on a home.


Retirement is the ultimate long-term savings goal.

Now back to the original question: How much should you save a month? Let's break this down by goal:

1. Retirement

You should consider saving 10 - 15% of your income for retirement. Sound daunting? Don't worry: your employer match, if you have one, counts. If you save 5% of your income and your boss matches another 5%, you've accomplished a 10% savings rate. 

2. Emergencies

You should also consider establishing an "emergency fund" that can cover 3-9 months of your living expenses.

How can you save such a large sum? First, calculate your cost of living you should be able to find a calculator on. Assume that if you lose your job, you'll sacrifice luxuries such as pedicures or your premium cable TV package. How much do you need to survive?

Divide that number in half. Can you save this monthly? If so, you'll build a six-month emergency fund within the next year.

3. Everything else

Make a list of major expenses within the next decade, ranging from replacing your gutters to throwing your wedding. (If it's easier, list broad categories like "home repairs," "holidays" and "wedding.")

Write your ideal savings goal target and deadline. Divide by the number of months remaining to see how much you should save. Want to pay cash for a $10,000 car in five years? You'll need $167 per month.

When you run through this exercise, you'll probably discover that you can't save enough for every savings goal on your list. You now have four options:

Most people opt for a combination of those four choices. You might decide you'd be happy buying a $7,000 car, which will require only $116 per month. You cut your $50 cable bill and pick up a babysitting gig one night per month, and voila — now you're on-track to pay cash for your next car.

50/30/20 rule

Did you want a simpler answer? No problem. Here's a final rule of thumb you can consider

at least 20% of your income should go towards savings. More is fine; less may mean saving longer.

At least 20% of your income should go towards savings.

Meanwhile, another 50% (maximum) should go toward necessities, while 30% goes toward discretionary items. This is called the 50/30/20 rule of thumb, and it provides a quick and easy way for you to budget your money.

If you want to optimize your savings, run through the exercise described above.

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