Building healthy savings habits is essential for your financial success — but many of us aren’t sure where to get started. What exactly are you supposed to do with the money you’ve saved? And how much money do you really need to save each month?
Increasing your savings amount each month can feel overwhelming, but if you’re in a position to do so, it can play a huge role in your financial future. Making a plan and deciding how much you can save each month is a great place to start. And if you’re already saving, figuring out if you’re saving enough can help you make better financial decisions.
Let’s dive into the details below.
Why saving money is so important
Having a financial safety net can make a world of difference, particularly in our current uncertain economy. A 2020 survey conducted by Highland Solutions found that since the coronavirus pandemic hit, 63% of Americans have been living paycheck to paycheck. Of this group, 64% are millennials.
In fact, 58% of Americans have less than $1,000 in savings right now, if they even have a savings account at all. Since the average rent for an apartment in the U.S. is $1,468, this means that many of these Americans would not even be able to pay their rent if they were to lose their jobs today.
This is why building a savings account and working towards savings goals is so important.
How much should I save each paycheck?
One of the myths floating around on the internet is that you should be saving 10% of your paycheck. So, if you make $1,500 every two weeks, you should be putting $150 away in some sort of savings account.
While 10% is a good number to start with, it’s often not a high enough rate to cultivate a significant retirement savings account. However, that number doesn’t include short-term savings goals, building an emergency fund, or investing options. And, often enough, 10% isn’t enough money for many to require comfortably — especially women who tend to live longer than men.
Instead, I recommend setting a savings goal of 20% to 30% and working towards this goal. This means if you bring home $5,000 a month (post-taxes), you should be having $1,000 – $1,500 every month. Of course, it’s unrealistic to think everyone can begin saving this much right away, but having a goal established will give you a number to plan towards.
What to do to boost your savings right now
Saving any amount you can will help you learn and practice healthy savings habits. It may seem small, but $5 here and there can add up over time.
Cut unnecessary expenses
Many times we think we can’t begin saving money because our expenses are just too high. If saving is important to you, I recommend examining your expenses with a fine-tooth comb. Look at what can be cut or reduced by switching providers. Decide if there are any subscriptions or memberships that are no longer serving your lifestyle. Even small cuts here and there can add up.
Build an emergency fund
If you’re in a position to start saving — no matter how much or little — creating an emergency fund is essential. Building a savings fund that you can use in case of an emergency gives you more options should you lose your job, home, or find yourself needing to relocate.
An emergency fund can save you in a pinch and buys you time to plan your next move. Ideally, you’ll want to build up enough savings to cover three to six months’ worth of expenses. This way, if you lose your income for any reason, you have a cushion set aside to pay any necessary expenses while you secure new work.
I also recommend maximizing your emergency fund by opening a high-yield savings account. I personally use Ally Bank, which consistently offers competitive savings rates, as well as interest-checking accounts.
Save for retirement
It’s estimated that 63% of Americans believe they do not have enough saved for retirement. Saving for retirement can be tricky when you’re younger and not making a high salary, though starting your retirement savings at an early age is the best way to ensure you’ll have enough when you’re older. It’s also hard to emphasize this importance to younger professionals who feel so far from retirement age (and may be burdened with other debt).
Once you have an emergency nest funded (or have a plan in place to fund it by a certain date), I highly recommend contributing to a retirement plan next. You’ll thank yourself when you’re older.
If you’re working at a company offering a 401k or IRA (even better if they offer a retirement fund match), take advantage of it as soon as you can begin contributing. These workplace funds allow you to contribute pre-tax, making it less of a hit on your paycheck. Of course, the more you contribute the better, but don’t wait until you can afford a hefty payment. Contributing a small amount early on is much better than waiting.
If you’re self-employed or working for a company without a retirement plan, you can open one on your own. You can enroll in a ROTH IRA, CD, or other retirement investing account. I highly recommend contributing automatically each month, so you develop the habit. As your income increases or expenses decrease, up your contribution.
Pay down debt
Once you’ve started contributing to a retirement account, you can begin paying down your debt. You should always make at least the minimum payment (even while building your emergency fund and retirement savings), but now it’s time to look at significantly reducing your debt.
Where you start is entirely up to you. Some people have good luck with the snowball method (paying off the lowest debts first), since this allows them to visually see debt accounts disappearing quickly. Others prefer to pay off the highest balances or highest interest rate accounts first.
Every method has its pros and cons, but what’s most important is making paying down your debt a regular savings habit. Personally, I combined the above theories when lowering my debt, reducing it by $35,000 in just over two years.
We’ve all heard the tired phrase — the best time to start investing was yesterday. While this is true, I don’t promote thinking about it this way. It encourages guilt and negative emotions about not being able to do something earlier in your life.
Instead, I maintain that the best time to start investing is once you’ve established an emergency fund. Your retirement savings, for instance, is an investment.
If you want to start investing in the stock market, I personally recommend index funds for anyone looking for a lower risk, easy way to build long-term wealth. The Fidelity® 500 Index Fund is one of my top picks, particularly for anyone looking for a hands-off approach to investing. It rivals the Vanguard 500 Index Fund, but is more affordable and has no minimum investment requirement to get started. It’s essentially a blend of the top 500 U.S. companies on the market, allowing you to buy partial shares of large corporations like Google and Amazon.
Another option is to automate your investment savings with an app like Acorns or Digit. These apps help you build up savings to invest by taking your spare change or small transactions and moving them into an investment account.
As you earn more, save more
Saving money can feel overwhelming, particularly if you’re living paycheck to paycheck. It’s impossible for everyone to save 20% of their paycheck right away, so don’t feel guilty if you’re not able to. Instead, I encourage you to begin saving any amount possible and continuously contributing to this savings account. Building the habit of saving money is what will ultimately help you meet your financial goals over time.