How Much Money Should I Save Each Month? (2024 Advice)

pink piggy bank for saving your money every month

The number one factor holding most Americans back from financial freedom is a lack of savings. For this reason, you may wonder if you’re saving enough of your paycheck every month, or how to think about your savings goals. As tempting as it is to compare ourselves to others, this approach may set us up for failure…

Average Savings In The U.S.

Surveys conducted by Bankrate have consistently found that only 35% – 45% of U.S. adults can afford to cover a $1,000 unexpected expense. These same surveys show that, when emergencies inevitably arise, adults primarily choose to cover the expense with a credit card.

The average interest rate for variable-rate credit cards was 20.7% as of January 2024 and is expected to remain elevated throughout the remainder of the year. Faced with a tight budget and high interest rates, it’s not hard to see how one setback can lead to a vicious debt cycle that is hard to climb out of.

On the other hand, the S&P 500, a benchmark for the performance of the U.S. stock market, has historically returned around 10% per year. Those who can stave off expensive debt can invest and participate in this upside, giving themselves even greater protection against unexpected expenses.

When deciding how much of your income to save each month, it’s important to realize that these factors mean the relationship between savings and wealth is not linear.

The relationship between savings and wealth is not linear.

One dollar saved or invested today is worth much more than one dollar. Not only do savings protect you from incurring high-interest-rate debt, but also they open up the potential to generate passive returns. This second stream of income, even if small compared to your primary income, can make all the difference in a tight budget.

If this all sounds like the reason the rich get richer and the poor get poorer, it is. And fighting to get out of the second camp starts with saving as much as you can afford to.

The 50/30/20 budget

A popular budgeting method known as the 50/30/20 rule helps to answer the question of how much money should you save every month. The rule suggests splitting your monthly after-tax income into three buckets: needs, wants, and savings.

The guide proposes allocating 50% of your income to “needs” such as housing, food, utilities, and transportation; 30% of your income to “wants” such as entertainment, travel, and eating out; and 20% of your income to savings and reducing any debt.

While this rule of thumb is a helpful starting place, not all budgets are created equal. Those with lower income levels, where home and car often make up a larger share of expenses, may struggle to devote 20% of their income to savings. That’s not a problem – saving early and often is the real key to success.

And on the flip side, those with higher incomes often can – and should – save significantly more than 20%. If you find yourself in this camp, you have the luxury of deciding how aggressively to pursue your financial goals. Depending on income, age, and short-term expenses, you can customize your budget depending on how much you’re willing to forgo in pursuit of reaching financial independent faster.

Step one: Create a budget

No matter how feasible you think the 50/30/20 budget may or may not be for your situation, the first place to begin when deciding how much money to save every month is with a budget. It’s important to determine what your spending is before moving on to what it should be.

Many first-time budgeters fall into the trap of setting an idealistic budget without first considering their current lifestyle, and how difficult it may be to implement changes.

Starting with a reasonable time frame, perhaps the last 12 months, aggregate all of your income and all of your spending. Usually, this is best done in Excel by exporting credit card transactions and bank statements.

Categorize all of your expenses into several key groups: housing, groceries, utilities, transportation, entertainment, etc. From here you can begin to zoom out and see your financial picture. How much money are you making? Where is your money going? How much money are you currently saving each month?

This is an important opportunity to reflect on your current lifestyle, and it’s unfortunate how few people take the time to do this. Perhaps money is tight and saving will require a maniacal focus on expenses. Oftentimes, however, the big picture shows us just how much we’re spending at restaurants or Target. By taking the time to analyze the past, we’re given actionable insights into how to improve the future.

Related reading: How To Save $10,000 In A Year On Any Income

Step two: Create a savings plan

Let’s start with the baseline suggestion from the 50/30/20 plan. If you’d like to save 20% of your money each month but you currently live paycheck to paycheck, there are only two possibilities. You’re either going to have to start smaller, or your monthly budget is going to have to change significantly. Be honest with yourself about which camp you fall into.

As you begin to plan for what is possible, think about how hard each change in your monthly budget will be to implement and stick to. For some, making coffee at home and cutting out the morning trip to Starbucks will save an extra $100 per month. For others, that’s a luxury worth fighting for – and they may instead opt to cook meals at home or carpool to reduce spend on Uber.

To ensure that your savings plan is sustainable, start with the easiest changes to implement – those that are the least painful in your day-to-day life. As you grow accustomed to them, consider adding other cost-saving measures.

Continue this process until you reach a point where there are no more budget cuts worth fighting for. Then, review any creative ways to save money you hadn’t yet considered. Where you stop is, of course, a deeply personal decision.

You should find yourself weighing the benefit of today’s pleasures against the increased time it will take to create a comfortable financial cushion. And if you have a difficult time implementing your budget plan, try adopting cash envelopes to force your hand.

Where should I keep my savings?

Once you have determined how much you can consistently save from each paycheck, it’s time to decide where to put your savings. Though it depends on your current financial position, the wisest first step is to build up an emergency fund. Most financial planners recommend you keep 4-6 months of cash needs (your total monthly expenses x 4-6) on hand in case of unexpected expenses, job loss, etc.

During this initial phase, place the majority of your savings in a high-yield savings account. There are many to choose from but we here at TMM have personal experience with Marcus by Goldman Sachs. Marcus offers no fees, no minimum deposits, FDIC insurance, and a 4.75% APY which is around 50x higher than a standard savings account from Bank of America or Chase Bank.

After protecting your downside with an emergency fund, the real fun begins. As much as possible, we recommend you take advantage of tax-advantaged investment accounts. Typically these opportunities provide the greatest return on investment due to the tax benefits, and sometimes, employer matching.

However, these accounts are much less accessible, without penalty, than savings accounts. Many incur penalties if drawn before retirement age for anything beyond a few specific use cases (medical bills, first home purchase, college costs, etc).

So before investing in the following accounts, think closely about any near-term cash needs that you have not already set aside for. But don’t let these warnings deter you from turning your monthly savings into a monthly investment.

After all, Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”

Outside of an unexpected windfall of cash, there’s nothing like the financial security of letting an investment compound until retirement.

Tax-advantaged investment accounts

Placing your savings inside one of the following accounts is a great way to kick-start your investing journey. These tax-deferred accounts allow you to contribute pre-tax dollars (subject to some limitations), meaning that every contribution reduces your tax burden, potentially enabling you to save even more. Your investments will also grow tax-free, allowing you to defer taxes until retirement when you begin withdrawing the funds.

Traditional 401(k)

If your employer offers 401(k) matching, this is a great place to focus your savings efforts. Every dollar matched by your employer is essentially free money that can be invested to earn you even more free money. Maximize your employer’s match before considering other tax-advantaged options.

Self-employed 401(k)

If you’re a small business owner, you can create your own 401(k) program and contribute much more money than those with a traditional 401(k). In 2024, a traditional 401(k) allows up to $23,000 in pre-tax contributions, whereas a self-employed 401(k) allows up to $69,000 in contributions. This option works especially well for employers without any W-2 employees.

IRA

Individual Retirement Accounts function like 401(k) accounts but there are a few key differences. First is that anyone can create and contribute to an IRA – savers are not reliant on the benefits package of an employer.

Second is that IRAs are subject to certain income limits if you’re eligible for a 401(k) plan at work. Finally, IRAs have lower contribution limits – $7,000 for individuals under 50 in 2024. If you don’t have a 401(k) already or you’re just looking to go above and beyond, IRAs provide a great starting point for savers.

HSA

Health Savings Accounts are sneaky good investment accounts as well. An HSA allows you to contribute up to $4,150 pre-tax in 2024. The money can be used for qualified medical expenses without incurring any tax, effectively reducing the cost of medical bills.

But here’s the kicker – any excess funds not used for medical expenses can be invested freely. Much like traditional retirement accounts, funds can be withdrawn at 65 for any purpose, and only then will they be subject to tax.

Check with your employer to see if they offer or sponsor an HSA plan, otherwise, you can still create your own individually. (Editor’s note: I use HSA Bank which is linked with TD Ameritrade)

Related reading: 100 Envelope Challenge: Save Over $5,000 In Just 3 Months

Summary: How much money should I save every month?

The amount of money you should save every month depends on a few key factors. We recommend using the 50/30/20 rule as a starting point and making adjustments from there. Low-income savers should strive to save 20% of their after-tax income, but not get discouraged if the budget doesn’t quite allow it. High-income savers should save a minimum of 20% of their earnings.

In either case, we suggest reducing as many expenses in the “low-hanging” category as possible and creating an emergency fund. This emergency fund will protect you from the grip of an expensive credit card when life happens. Once your emergency account is fully funded, maximize employer matching and tax-advantaged investments.

Exactly what percent of your income you save is not important. Cop out answer? Perhaps, but it’s the truth. Whether you save 15% or 35% of your paycheck is not what counts. Save as much as you can without sacrificing your quality of life, and save wisely by maximizing the benefits available to you.

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