# How Much Should You Be Saving Each Month?

### Abiding by general rules of thumb might not be good enough. Learn how much you should be saving, where to put your money, and how to account for the unknowns.

Happy Friday morning everyone! I’m excited to announce my new editor and contributor, Cleo (pictured below). My budget for a new team member was pretty tight, but I was able to convince Cleo to come on board by offering a competitive salary consisting of food, rent, and pets.

Today’s article is about how to determine the amount you need to be saving; I focus on retirement, but talk about other savings goals as well, including emergency funds, cars, and houses.

It can be difficult to know how much money you should be saving. Getting it right can mean having a successful retirement and passing money on to your heirs, and getting it wrong could mean running out of money before you die. Exactly how much money do you need to save to ensure you don’t die cold, broke, and afraid?

## Emergency funds

Before you tackle saving for retirement, you need to make sure you have an adequate emergency fund for unexpected expenses. There is one exception: if you receive an employer match for your retirement plan at work, you may want to get the match before you have an adequate emergency fund. This is because an employer match is a dollar-for-dollar match on retirement contributions, a 100% rate of return on your money (if you only get a 50% match, that’s still a 50% return on your money).

If you prioritize getting the employer match over building an emergency fund, and the unexpected happens, you may be faced with an unexpected credit card bill. The average interest rate for credit cards is 17.30%, which means it makes financial sense to get the employer match with a return of 100% or 50%, even if you are forced to pay credit card interest as a result. Hopefully you won’t have to choose between getting the employer match and racking up credit card debt.

If you don’t have an adequate emergency fund, save as much as you can until you do. Emergency funds should be different based on your job security, type of employment (is your job cyclical? would you likely lose your job in a recession?), and if you are the sole provider of support for your household. If you work in construction, are unsure about your job security, and are the sole breadwinner for your household, you need a larger emergency fund. If you have great job security (and would easily be able to find a new job if you lost your current job) and your partner is also working to support your household, your emergency fund may not need to be as large.

An emergency fund should last for however long you imagine you would be out of work if you lost your job, and if you think you could likely lose your job you should have a larger reserve. Keep your emergency fund in a high-yield savings account; you can compare rates and read reviews at Bankrate.com.

## Saving for retirement

How much of your income should you be saving for retirement? 10%? 15%? 20%? Even more?

The truth is there’s no one-size-fits-all retirement savings goal that everyone should be striving for. If you started saving at a young age, you can probably get away with saving less than someone who started at a later age. I want to give you some real numbers, though, instead of just telling you “it depends.”

Let’s say you are 25 years old, make $50,000 a year, and will make that for the rest of your life (but you’ll get cost-of-living raises to keep up with inflation). Let’s also assume you will never get married and will need a salary of $40,000 a year to live off of in retirement. We’ll also pretend that Social Security no longer exists, either.

Assuming you retire at 65 and plan to live until 95 (leaving nothing to your heirs), you’ll need $625,265 at age 65 (in today’s dollars, assuming your portfolio returns 8% per year and inflation is 3%). To get that amount of money, you need to save $447 a month. That works out to 10.7% of your gross income, but if you get an employer match or factor in Social Security, that number drops even lower. And if you have retirement savings already, that number drops even further - if our fictional 25 year old already has $20,000 saved for retirement, they only need to save $352 a month (8.4% of gross income).

## Let’s talk about you

You probably don’t make exactly $50,000 per year, and your life probably looks much different than our fictional character’s life. To calculate the amount of money you should be saving, you need to familiarize yourself with a financial calculator. You can find free calculators online.

Here’s how to calculate your own retirement need with a financial calculator:

For payment (PMT), enter the estimated salary you’ll need each year in retirement. If you aren’t sure, just multiply your current salary by 0.8 and use that.

For future value (FV), enter 0. (This assumes you want to leave the earth with no money, or die broke essentially. If you want to be more conservative, enter a higher number here.)

For interest rate (I/Y), enter 4.854%. (This assumes an 8% return and 3% inflation. If you’d like to use different assumptions, use the formula (1 + Expected Rate of Return ÷ 1 + Expected Rate of Inflation) - 1 to get your interest rate.

The number of periods (N) should be the number of years you expect to be in retirement. If you aren’t sure (or don’t want to think about it), enter 30.

Solve for present value (PV).

The present value you see is the amount of money you will need at retirement, in today’s dollars. To calculate how much you need to save to reach that amount, enter the amount you currently have saved for retirement in the present value (PV) field. For the future value (FV), enter the number you ended up with at the end of step 5. Leave the interest rate (I/Y) at 4.854%, or whatever value you were using earlier. Change periods (N) to the number of years you have left until retirement. If you aren’t sure, just subtract your age from 65. Now solve for payment (PMT).

Your payment (PMT) is the amount of money you need to save each year to retire. Divide by 12 if you’d like to know the monthly amount.

## How to account for the unknowns

We don’t know if Social Security will be changing as we get older. We don’t know what inflation will be, and it’s difficult to know what kind of returns you can expect in the market. We are in a period of historically low inflation, and right now it’s roughly 2% per year. I estimated 3% inflation and an 8% rate of return, but you could argue that either number should be higher or lower depending upon what you believe will happen in the U.S. and global economy over the next century.

You probably don’t know exactly how much money you’ll need in retirement, either (I would be very impressed if you did). There’s no getting around the fact that you’ll need to make several different assumptions when calculating how much money you should be saving for retirement. It’s best to make conservative guesses when making retirement needs calculations; if you’re too aggressive, you could end up underestimating the amount of money you need to save and run out of money before you leave retirement (I like saying leave retirement...it sounds a lot better than dying).

Assume you’ll get a lower rate of return in the market than you expect (but still try to be accurate). Inflation is historically low right now, but assume we will have periods of high inflation between now and the time you retire. Assume you will need more income in retirement than you think you will; many of us tend to overestimate our frugality. If the worst-case scenario happens and all of your conservative projections turn out to be correct, you’ll have an adequate amount of money saved for retirement. If the best-case scenario happens and your estimates are too conservative, you’ll end up with more money than you need.

## How do I save for a house or a car?

When buying a house or a car, you should aim to put 20% down when you make your purchase. This is because cars depreciate quickly, and the value of your home could drop suddenly if there is a downturn in the real estate market. Putting 20% down when you purchase gives you a nice buffer zone if/when the value of your car or home drops, and makes it more difficult for you to end up “underwater” (owing more than the asset is worth).

For purchases you plan to make within the next five years, you generally want to invest in safer assets, such as high-yield savings accounts, money market accounts, and CDs. This protects your savings from a drop in the stock market. If your goals are more long-term, you may consider investing in the market. You can use your new financial calculator skills to determine how much you should be saving to meet other financial goals.

## Where exactly do I save for retirement?

Prioritize saving for retirement in tax-advantaged accounts, such as IRAs and employer-sponsored retirement plans. HSAs can also be great long-term investment vehicles. If you don’t have an IRA, you can open one with any of the Big Three (Charles Schwab, Vanguard, and Fidelity). Schwab and Fidelity have no minimums to get started, and with Vanguard you need at least $1,000. You may want to go with a Roth IRA if your combined marginal state and federal tax rate is under 25%, and if it’s over 30% you may want to consider a Traditional IRA (in-between is a gray zone).

You can contribute up to $6,000 per year in an IRA, and up to $19,500 in a 401(k). Target-date retirement funds are a great investment choice for hands-off investors, and if you want to have more control over the allocation of your portfolio you may want to use a mix of index funds that track international and domestic stock and bond markets.

Saving money is hard, especially when you’re young and not making very much money. Dollars saved at a young age will grow exponentially though, so you should try to save as much as you can, even if it isn’t very much.

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