Asking exactly how much you should save is a lot like asking, "How much should I eat?" The answer depends entirely on how hungry you are and what your health goals look like. We know it's easy to feel pressure from generic financial advice, but figuring out your savings rate isn't about restriction. It's about defining the life you want to live and creating a roadmap to get there.
Why one size doesn't fit all
The financial industry loves to give blanket advice. You've probably heard that you need to save a specific percentage of your monthly paycheck or that you must have one million dollars ready for retirement. The problem is that your life is unique, and what works for your neighbor might not work for you.
According to broad industry estimates, if you're currently saving anything at all, you're already doing better than over 25% of American workers. That is a great start.
Your specific context matters immensely. For example, someone aggressively paying down massive student loan debt is in a completely different position than someone earning six figures with zero debt. Before you stress about a specific savings number, it's critical to get a clear handle on your expenses and your broader financial picture.
The 50/30/20 framework
If you aren't sure where to begin, the 50/30/20 Rule is a fantastic starting point used by many experts. It breaks your income down into three simple buckets:
- 50% towards needs: This covers the essentials like housing, food, utilities, insurance, and transportation.
- 30% towards wants: This is the fun stuff, including vacations, shopping, and dining out.
- 20% allocated to savings and investments: This is for your future self.
Think of these numbers as guidelines rather than rigid laws. This is a dynamic process. For instance, if you don't have any emergency savings yet, building that fund is likely a more immediate need than paying off extra debt. Once you have three months of expenses tucked away, you might shift gears to allocate more of your income toward clearing debt. Expect to tweak this roadmap as your priorities change.
Building your emergency safety net
One of the quickest ways to gain peace of mind is to establish a healthy emergency fund. This turns a blown tire or a leaking roof from a devastating financial crisis into a mere annoyance.
We know this is a struggle for many. A Federal Reserve study showed that roughly half of Americans don't have an emergency fund that could cover a $400 expense. If you have even that much saved, you are ahead of the pack. However, we want to help you build even more security.
For most people, a solid emergency fund covers 3 to 6 months of expenses. But again, your life dictates the real number. If you have a dual-income household, you might need less. On the other hand, if you are financially responsible for a child, or you work in a volatile industry with high turnover, you may want to set aside more.
Once that safety net is in place, you can look at other goals. If you're saving for a house, investing for retirement, or need to build a financial trust for a special needs child, you might aim to save and invest more than 20% of your income if it's possible.
Conversely, if you are financially secure with no debt and have a pension plus Social Security lined up, you might be able to save less.
Retirement and free money
An easy win for your savings calculation is looking at your employer's retirement roadmap, such as a 401(k). If your employer offers a match on your contributions up to a certain percentage, you should contribute at least that amount.
If you don't, you are essentially leaving "free money" from your employer on the table.
It's also worth remembering that very few people look back and complain that they saved too much money for the future. However, many retirees do regret that they saved too little.
Where to keep your savings
Once you know how much to save, you need to know where to put it. There is one rule of thumb here that you should follow religiously.
Only invest money you won't need for at least five years in stock-based funds.
Any money you need for short-term goals, like your emergency fund or a down payment to buy a car in two years, should be kept in a liquid, interest-bearing account. You don't want market volatility to impact cash you need soon.
Here are five vehicles to earn compound interest that make sense for money you'll need within the next five years:
- Checking accounts
- Bank savings and money market accounts
- Certificates of Deposit (CDs)
- Bonds (savings, municipal, Treasury, and corporate)
- Money market funds and bond funds (through a brokerage)
The Facet difference
Deciding how to balance your needs today with your goals for tomorrow can feel complicated, but you don't have to do it alone. At Facet, we believe expert financial advice should be accessible to everyone, not just the ultra-wealthy. Our membership model provides you with a CFP® professional who acts as a partner in your journey. We don't just look at your investments. We look at your whole life to help you make decisions that align with your values.
