How Much of Your Income Should You Save Each Month?

Tyler Parker, Preferred Banking Office Manager, First Republic Bank
March 29, 2022

  • There's no one right answer for how much of your income you should save.
  • There are multiple rules and guidelines that can help you create a savings habit.
  • Review your financial goals, monthly income and spending to determine how much you can save every month.

Creating smart financial habits today is the best way to build savings for tomorrow. But how much of your income should you save every month? While there are multiple helpful rules of thumb in personal finance, there's no one correct answer for every saver. For instance, some individuals use the 50/30/20 budgeting rule, which suggests dedicating 20% of your monthly income to savings, 50% for needs and 30% for wants. 

However, if you’re just beginning your savings journey, those percentages may look more like 60/30/10. Or if you’re aggressively saving, the ratio may be 50/25/25. The amount of income you decide to save each month depends on your financial goals, current expenses and overall savings capabilities. 

Read on to learn more about the factors that inform your savings plan and how to create one that fits your life and financial goals

Establish your own monthly savings rule

The average savings of Americans varies by age, with younger savers reporting a median of $3,240 in their accounts. Meanwhile, savers older than 75 have a median of $9,300. As you establish your own rule for how much to save each month, consider what makes sense with your monthly expenses and take-home pay.

What is the 50/30/20 Rule?

The 50/30/20 is a simplified way of designating how much of your income to save each month. The rule suggests that you:

  • Save 20% of your income.
  • Spend 50% on basic needs such as housing and food.
  • Spend 30% on wants such as travel or clothes.

The best savings rule is the one that works for you. Higher-income individuals, for example, will likely save more than someone new in their career and just starting out. The most important factor, though, is that saving any amount of your income is better than saving nothing. The more you can consistently contribute to your savings, the faster you’ll be able to reach your financial goals. Consider these steps for determining the best savings plan for you. 

Look at all sources of your income

The first step toward assessing how much of your income to save each month is evaluating all your income sources. Review how much you earn each month from your primary job and include bonuses, tips or other sources of income that supplement your regular salary or wages. Also, consider whether you earn extra money from side gigs or part-time work.

Consider your cost of living

Once you understand how much you earn, dive into how much you spend. Your living expenses — from housing and food to entertainment and travel — will impact how much you can save each month. To accelerate your savings, find ways to cut back the spending on your “wants.”

Pinpoint your financial goals

A savings goal can help turn your savings plan into tangible action. For example, you may be saving to build an emergency fund or buy a first home. Knowing why you want to save can help make the effort feel worthwhile and provides helpful parameters, such as a timeline for your goals.

For example, if you plan to buy a house within a year, you may want to aggressively save over the next several months to build up a down payment. However, building an emergency fund may be more of a steady effort that you contribute to over the course of months or years.

Choose where to place your savings

Where you save your money depends on the previously mentioned goals. There are multiple types of savings accounts, each offering various benefits to help you maximize your saving efforts. Some common types of savings accounts include:

  • Traditional savings account: Offered by your bank, a traditional savings account provides a small amount of interest on your savings and easy access to your money.
  • High-yield savings account: These provide a higher interest rate than traditional savings accounts and may come with deposit minimums and withdrawal limitations.
  • Money market deposit account: These also offer higher interest rates than traditional savings accounts and may come with check-writing privileges.
  • Investment accounts: Accounts such as 529 college savings plans or individual retirement accounts provide tax-advantaged ways that may grow your account to meet your specific goals. Consider Roth IRAs, in particular, which allow you to contribute after-tax money that grows tax-free and can be withdrawn tax-free after age 59 1/2.
  • Cash management account: These generally combine the benefits of a savings account with check-writing and investment capabilities.
  • Certificate of deposit (CD): This a time deposit account that can be used as a savings vehicle. CDs offer a guaranteed interest rate in exchange for a predetermined length of time for the deposit.

How to contribute now toward your savings

As you progress on your savings journey, you’ll want to regularly assess the effectiveness of your plan and whether you need to make any changes. For example, you might realize that you can save more than you anticipated or dedicate more to retirement savings.

On the flip side, you may determine that paying down credit card debt is more important than accelerating savings and focus your attention there. Here are some ways to accelerate your savings and reach your financial goals faster.

  • Automate your savings: Dedicate a specific amount to automatically transfer from your checking account to your savings account each month. Doing so means you won’t have to think about saving — it’ll be easy and automatic.
  • Save bonuses or cash windfalls: Save any bonuses or cash windfalls, such as gifts from family or earnings from an unexpected side job. These additional amounts will give your saving efforts a big boost.
  • Monitor your monthly income: Keep track of your monthly income and establish a rule for what percentage you want to save. Stick to your rule, and your savings will consistently grow.
  • Maintain your cost of living: As your income increases, try to keep your cost of living and monthly expenses at the same level. You’ll be able to save more money each month and knock down your financial goals more quickly.

Creating a savings plan empowers you to reach your financial goals and gives you the tools for getting there. Regardless of how much of your income you save each month, establish the habit and you’ll put yourself on a solid financial path for the future.

The strategies mentioned in this article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the tax and legal consequences of any strategies mentioned in this document. This information is governed by our Terms and Conditions of Use