Sep 17 · 2 min read
Looking for a higher interest rate on your savings? Compare the best savings accounts using our tools!
Before you actually start saving money, you may be wondering, “how much exactly should I save?” While everyone’s financial situation is unique, there are some general rules that will help you set a savings goal.
Arguably, the most important goal of saving money is building an emergency fund. Life happens and often when it does, it can be very expensive. This is why it is generally recommended to save enough money to cover three to six months worth of living expenses. While this is definitely a great amount of money, it will help prevent you from adding credit card and other personal loan debt when emergencies occur. Saving this amount of money also allows you to cover expenses for a few months if you lose or quit your job.
Even if saving three to six months worth of expenses seems non-realistic to your personal situation, stashing away any amount of cash will help minimize how much debt you’ll possibly have to take on to cover an emergency. Since a few hundred bucks can cover a great number of common emergencies like home and auto repairs, don’t shy away from starting small.
Also, don’t feel the need to build your emergency fund all at once. Although the faster the better, building your emergency fund can be accomplished over time. Use your typical monthly expenses to calculate your emergency fund goal and divide this amount into multiple deposits to your savings account.
Once your emergency fund goal is reached, feel free to start depositing your money into high-risk, high-reward investments like stocks instead.
Another great way to determine how much you should be saving is the 20% rule. If you’ve watched our videos on budgeting, you’ve probably noticed that multiple budgeting methods require you to save at least 20% of your after-tax income. Without digging deep into the calculations, saving at least 20% of your income is a great start to financial freedom. If you can save more than 20%, then even better. Since the “savings” category in budgeting includes savings accounts, investments, and retirement funds, the more you save, the faster you’ll reach your long term financial goals.
As an example, let’s say you decided to get whyze and save 20% of your income. 10% of your savings could go towards an emergency fund while the remaining 10% could go towards your retirement funds.
While it may seem like a tough job to save money, you won’t be able to grow your wealth without doing it. After deciding your personal goal for saving money, use a high-yield savings account, money market account, or certificate of deposit (CD) to build your savings faster.