Saving money is one of those complicated financial tasks that can stump even those who have been saving all their life. Everyone can agree having savings is important to financial health, but there isn’t a consensus about how much you need to save each month.
Like many things that fall under the umbrella of “personal finance,” the answer is personal. It depends on a broad selection of things pertaining to your unique life — from how much you make to the dependents you have.
That gives you a lot of room for interpretation and improvisation. If you find this freedom hard to compute, these general financial rules might help.
Your Emergency Fund Should Contain 3 To 6 Months of Living Expenses
Perhaps the most well-known rule about savings is this: you should aim to have three to six months’ worth of living expenses set aside for a rainy day.
This considerable sum sets you up for success — whether you have to deal with several unexpected repairs or lose your job suddenly. You can withdraw from these savings as the bills come in or rely on them as a makeshift salary until you can get another job.
Once you decide whether you want to shoot for three or six months, you’ll want to decide when to achieve this goal. Then you can divide your sum by the number of months you want to do it. That number is how much you have to save each month.
Of course, you might have to tweak your timeline to reflect your budget better. Giving yourself more time to achieve your goal will mean your monthly contributions can be smaller.
What if You Fall Short of Your Goal?
Smaller contributions mean it will take more time to get a solid emergency fund together. So, what happens if your emergency arrives before you hit your targets? Plenty of people low on savings fall back on personal loans, credit cards, or lines of credit to get by.
You might consider online direct loans if your emergency is short-term, unexpected, and unlikely to happen again. Before you apply, make sure you weigh the benefits of this type of loan with possible disadvantages to know if it works for your emergency.
However, online direct loans and lines of credit won’t help in case you’ve lost your job. You’ll want to reach out to government organizations to see how you can enroll in unemployment and other financial assistance programs.
Consider the 50/30/20 Method for Guidance
If you aren’t sure you’re setting aside an appropriate amount of savings each month, the 50/30/20 rule can provide insight. This budgeting method breaks down you’re spending into three main categories and assigns a percentage of your net income to each one.
Your essentials rightly take the lion’s share of your income at 50%. It also budgets for 30% of your income to go towards discretionary spending on fun stuff. Lastly, this budget reserves 20% of your income for savings.
You should spread this amount across all your savings goals, divvying up 20% of your paycheck between emergency savings, sinking funds, and retirement.
While you don’t have to follow this breakdown exactly, it can help you put your savings into perspective. You don’t have to save all of your disposable income to be financially secure. A balanced approach to savings can help you reach your targets and improve your financial health.