How Much Should You Save Each Month?

Before repaying more than $100,000 in credit card debt and loans, I was like many Americans: living paycheck to paycheck, with nothing saved for emergencies. I wasn’t one of the 50% of Americans who said they’d be able to cover a $500 emergency with their savings. And when I stopped working, my family’s household income dropped by 30%. I soon learned (by force) to budget and control my spending, which opened my eyes to the power of saving.

Saving is an essential skill that you can improve over time. I’ll share some tips for implementing savings strategies that really work, so you can keep more of your hard-earned cash.

How much should you save each month?

As you begin developing a savings strategy, learning to budget is a must. How you budget is up to you as long as you make it a priority. 

Whether you build your budget on a spreadsheet or download the latest budgeting app, there are several classic budgeting approaches to consider. Five popular strategies include:

• 50/30/20 budget. With this approach, you divide your take-home income into three spending categories: 50% for living expenses and essentials (or needs), 30% for discretionary spending (wants) and 20% for savings and debt elimination.
• Zero-based budget. This technique requires you to create a new budget each month (or pay period) and identify how each dollar will be spent, deducting the amount from your income until you reach $0. Under this approach, you create a new spending plan for all of your upcoming expenses instead of making adjustments to a previous month’s budget.
• Envelope method. This is my favorite form of budgeting. Also known as old-school envelopes (because your great-grandparents likely managed money this way), the envelope method uses envelopes to divide your spending allotment based on categories.
• Values-based budget. With this approach, priorities and values dictate how you allocate funds to budget categories. You may choose to forgo a car purchase and use public transportation or purchase a bike if reducing your carbon footprint is important. Instead, you may allocate a larger portion of your budget to include organic groceries and health supplements.
• Pay-yourself-first budget. As the name suggests, you save a predetermined amount of your income when received before paying other obligations. You should analyze your bills and expenses first to determine a savings amount that’s reasonable for your income and lifestyle. This approach works well when automated so you can build a consistent savings habit. After directing a portion of your income to savings, use any method described above to manage the remaining funds in a manner that best suits your needs.

How to start saving money

As I was learning to live on a budget at the turn of this century, I set aside time on my calendar -- when there were minimal distractions -- dedicated to identifying all expenses, reviewing my progress with the previous budget and planning my spending for the upcoming period. If there are multiple people in your household who depend on your budget, invite them to this recurring meeting. Each new budget meeting will help you see what works, what doesn’t and what adjustments need to be made.

Determine what’s realistic for you

Elle Martinez, a personal finance podcaster and the author of Jumpstart Your Marriage and Your Money, says that in the beginning you should keep things simple and be very clear about your goals. “Are there things that you like to do throughout the year, debt-free? A big one for us was vacations and travel,” she says. 

Martinez and her husband worked backward from their goal to build savings in smaller steps. “When we were starting out, we couldn’t spend more than $1,000 on our annual vacation. With that number in mind, we worked backward, and we would save about $90 per month.” 

Thinking about the upcoming year and identifying special purchases or larger expenses is a great way to set savings goals. Dividing the purchase amount over time into smaller portions will help you set a monthly savings target.

Martinez reminds us that it’s OK to start with small goals. “Early on, I was spreading myself out thin,” she said. She decided to focus on saving an emergency fund and was able to build momentum when she narrowed her focus. “Having a taste of accomplishing something created a mindset shift and made a huge difference,” she said.

Get started with ‘something’

Being intentional with saving is key to improving your financial health. “Think about your sources of income, the predictability of your income and the timing of your income,” says John Thompson, vice president of financial services for H&R Block. “Design your plan around that and start to plan ahead as early as possible.” 

Using apps such as H&R Block’s latest budgeting tool, Spruce, can help you track your spending by categories and set targets that alert you if you’re exceeding specified limits. “This is key towards being better with managing money because it provides a unique insight into a person’s spending trends, empowering them to adjust their budget as needed, stay on track and reach their financial goals,” Thompson said.

Tips to increase monthly savings

Many experts recommend you save 10% to 15% of your income. “The most important thing is to choose a percent, or a dollar amount, you can save consistently,” said Andrew Housser, co-CEO and co-founder of Achieve, an online personal finance budgeting platform.

With a budget in hand, you’ll be able to review your income compared with expenses and can make clear decisions on how to proceed each month or pay period. 

If your expenses exceed income, look for areas to cut back or find options to increase your income. With my first budget, I realized that eating out regularly was costing much more than preparing meals at home. Looking at your numbers in black and white will help you make reasonable adjustments and become more intentional with your spending decisions.

Automate your savings

Use the power of setting-it-and-forgetting-it to your advantage. Once your savings are automated, you’ll adjust to living from what’s left in your checking account.

Use savings subaccounts

Banks and credit unions such as Ally or Alliant provide separate savings accounts that can be labeled according to a savings goal, such as wedding expenses or a car fund. 

Direct your savings to a specific subaccount. This feature can help you organize your financial goals and track your progress toward achieving them.

Save windfall sums

Anytime you receive an irregular sum of cash, such as a tax refund, dedicate at least a portion or even all of that windfall amount to savings. These irregular lump sums are a great way to help accelerate your savings goals.

Save by using percentages

When automating your savings, instead of specifying an exact amount, consider saving a percentage of your income. That way, with each increase in pay, you’ll automatically increase the amount of money you’re saving. You’ll be less tempted to spend more as you make more.

Seek professional help

If you’re struggling to save, the problem may be deeper. The way we think about savings can tie into how we were raised to view money. Connecting with a financial coach or other professional can help you reshape your financial outlook. 

Start by reviewing any financial services offered through your employer, bank or credit union. You can also turn to the National Foundation for Credit Counseling’s list of certified financial counselors who can help review your goals and create a budget.

Savings accounts that can help boost your earnings

The Federal Reserve recently announced that interest rates would remain at the current target range of 5.25% to 5.50%. And many experts predict that rates on high-yield deposit accounts will remain at the current elevated levels through at least the first half of 2024. Savers who take advantage of the increased rates can benefit from earning a higher return on their money.

Here are some accounts designed to help you reach your savings goals. Each deposit account -- from savings to CDs -- provides different features that you should review before deciding on the account that best fits your financial needs.

High-yield savings account

A high-yield savings account, or HYSA,  can earn over 11 times the national average annual percentage yield of savings accounts, according to FDIC, which is currently 0.46% APY. As the Fed continues to raise interest rates, many banks are raising their rates on savings accounts, too, some more than 5.00%.

Money market accounts

A money market account is a type of savings account that earns interest and provides check-writing privileges and debit card access. Money market accounts typically offer higher interest rates than traditional savings accounts that are as high as 5% or more, but they may also have higher minimum balance requirements.

Certificate of deposit accounts

A CD is a savings account offered by banks, credit unions or brokerage firms in which a lump sum of money earns interest at a fixed rate over a specified period of time, or term. When you purchase a CD, you agree not to withdraw your money from the account until its maturity date -- which can be as short as one month to as long as 10 years -- otherwise, you face an early-withdrawal penalty. 

A CD often earns a higher, fixed-rate APY. The yield on a CD can be upwards of 5.60% as opposed to a lower-earning standard savings account whose interest rate varies based on market conditions. Some experts have even found CDs offering more than 6% APY.

Specialty CD accounts

While many CDs are reaching highs not seen since the early 2000s, the downside of purchasing a standard CD is that you can’t touch your savings if you’re in a financial pinch, unless you face early withdrawal penalties. 

Some banks offer special versions of a CD that either allow you access to your money without charging an early withdrawal fee, such as a no-penalty or bump-up CD, or allow you to adjust the rate if the bank’s published APY changes after you purchase your CD.

These CDs generally have lower rates than a standard CD. However, you gain more flexibility over access to your money when needed. This can be especially useful for people who are invested in longer-term CDs.