The 50/30/20 rule says to save 20% of your income. But that's a broad guideline, and not a hard-and-fast rule. You should personalize your goal monthly savings amount according to your current age, the age at which you'd like to retire, and whether or not your employer will match your retirement contributions.
More than income or investment returns, your personal saving rate is the biggest factor in building financial security.
But how much should you save? $50 per month? 50% of your paycheck? Nothing until you’re out of debt or can start earning more money?
- How Much Should You Save Every Month?
- Why 20%?
- The 4% Rule
- How Long Will It Take?
- Getting to 20% — An Example
- What If I Just Can’t Save That Much?
- Where Should You Save?
- Bottom Line
Many sources recommend saving 20% of your after-tax income every month.
According to the popular 50/30/20 rule, you should reserve 50% of your budget for essentials like rent and food, 30% for discretionary spending, and at least 20% for savings. (Credit for the 50/30/20 rule goes to Senator Elizabeth Warren, who reportedly used to teach it when she was a bankruptcy professor.)
Read more: The 50-30-20 Budget Explained — an Easy Budgeting Method to Follow
I generally agree with the recommendation to try to save at least 20% of your monthly income. But it’s not a magic, one-size-fits-all number.
If, for example, you’re a high earner, you’d be wise to keep your expenses low, save a much larger percentage of your income, and meet your financial goals — like retirement — earlier than expected.
On the other hand, if saving 20% of your income seems implausible, or even impossible at the moment, I don’t want you to get frustrated. Saving something is better than nothing.
But if you want a shot at being secure through old age — and having some extra cash for things you want — the numbers suggest that 20% is the target you’ll want to reach or exceed.
Why 20%?
According to our analysis, assuming you’re in your 20s or 30s and can earn an average investment return of 8% per year, you’ll need to save about 20% of your income to have a shot at achieving financial independence before you’re too old to enjoy it.
Here’s the thing: If you’re ok with continuing to work until you reach an advanced age, maybe you don’t need to save all that much. Sure, you’ll still want to save for an occasional vacation and something in an emergency fund in case your car coughs up a radiator.
Beyond that, however, we save so that one day we no longer have to work for the money. For most of us, that day won’t come for many decades. But there are regular working people who strive to reach it as young as 40 or even 35.
The 4% Rule
True financial independence means having enough money so that you never need to work again. You can live off your current savings and investments — along with the growth, interest, or dividends of those investments — for the rest of your life.
How much money do you need to save to do that?
Good question. The simple answer: It all depends. It depends on whether you’re willing to live at the poverty line, need two homes and a sailboat, or fall somewhere in between. It also depends on how well your investments perform. If you can earn an average annual return of 10% on your money, you can stop working with a lot less than if you only earn 3%.
For simplicity’s sake, I’ll use the common “4% rule”, which states that, theoretically, you could withdraw 4% of your principal balance every year and live on this indefinitely. That means that you’ll need to save 25 times your annual expenses to become financially independent. (If the math doesn’t shake out for you, remember 25 x 4 is 100, and 100% = your total balance).
There are problems with the 4% rule, of course. For one, there are no risk-free investments that yield anywhere close to 4% today. Sudden inflation could also become a problem.
Also, if the growth of your investments turns out to exceed expectations, you might end up living for a long time on less than you could. That’s technically a great problem to have financially, as you’ll end up saving more. But living too far below your means might not be great for your overall happiness and well-being.
Nonetheless, I think it’s useful to plan using the idea of a 4% withdrawal, but then make adjustments as needed when the time comes.
How Long Will It Take?
The chart below shows how long it will take you to amass 25 times your expenses based on the percentage of after-tax income you save. This assumes an 8% average annual return, which is quite realistic based on how diversified investment portfolios have historically performed over long periods of time.
| 5% | 47 years |
| 10% | 39 years |
| 15% | 34 years |
| 20% | 30 years |
| 25% | 28 years |
| 50% | 20 years |
| 75% | 16 years |
| 90% | 15 years |
As you can see, by saving 20% of your income you’ll hit 25 times your annual income in about 30 years. That means a 30-year-old who starts saving today (assuming no prior savings) will hit this target by age 60.
But the more you limit your expenses, the sooner you’ll achieve your personal savings goal. Living a more modest lifestyle both reduces the overall amount of money you’ll need for retirement and allows you to save more during your working years.
Tax-Advantaged Accounts Can Help
If you qualify for a Roth IRA, use it! Money you contribute to a Roth IRA is taxed now but your withdrawals are tax free when you’re retired. So the more you save in a Roth, the less you’ll need to save in total because you won’t have to pay taxes on the Roth withdrawals in retirement.
Contributions to a 401(k) can also help ease the pain of reaching a 20% saving rate, assuming you can take advantage of at least a 5% match from your employer when you put money into a 401(k). This means you’ll really only need to save 15% of your paycheck.
Plus, if you’re putting money into a 401(k), this money will be deducted from your paycheck before taxes, which means that each dollar you deduct will save you some after-tax cash. But you will pay taxes when you withdraw the money in retirement.
Read more: How Much Should You Contribute to Your 401(k)?
Getting to 20% — An Example
Let’s say you make $1,200 every two weeks. After taxes, it’s $1,000. Your savings goal should be 20% of net (after-tax) income, or $200 from every paycheck.
If you make a pretax contribution to a 401(k) of 5% of your paycheck and it’s matched by your employer, that means you put aside $60 from your check before taxes (and your employer kicks in another $60). That’s $120 into your retirement account every month.
You still owe yourself $80. You could put half into a Roth IRA for additional retirement savings and the other half to build up an emergency fund. What you do with it doesn’t matter as much as the fact that you saved it at all.
Between pretax savings and employer matching, saving 20% of your paycheck gets a bit easier.
What If I Just Can’t Save That Much?
Don’t stress. Saving something is better than nothing.
I can already hear the shouts from the comments: “How ridiculous! I spend almost everything I earn on rent, food, and transport! This website is out of touch with its audience!”
Okay, okay. If the 20% scenario I just sketched out doesn’t fit your individual situation, then please don’t think that I’m saying you’re a failure. As I said, I believe everyone should aim for 20%, not that everyone can hit that target on their first try.
Start small. Start with 1%. When that doesn’t sting so bad, go up to 2% or even 3%. Maybe you hit 5%, and that feels pretty good. Maybe you take a crazy leap for 10%, and that leaves you stressed and strapped, so you scale back. It’s a process, a literal give and take.
Through it all, keep that 20% goal in mind. It’ll keep you from getting complacent. Whenever you get a raise, raise your saving rate! You were doing fine without that money before, and you shouldn’t miss it if you never get used to having it.
Finally, if you’re in debt, you might already be saving more than you think. That’s because paying down debt is essentially saving in reverse.
Think of it this way: One day, you’re debt free. But you’ve been making big monthly payments to your debts for years. If you suddenly begin to save that money, what would your saving rate be?
The trick here is to not replace that car payment or credit card bill when you pay it off.
Related: How to Get Out of Debt on Your Own
Where Should You Save?
Where you should save your money really depends on where you find yourself in your saving journey. If you don’t have an emergency fund yet, a high-yield savings account (HYSA) is a great place to build one. Easy access is of the essence in emergency situations, and you can withdraw money from a HYSA quickly. And unlike most checking accounts, a HYSA will generate, you guessed it, a high yield of interest.
Ready to start saving? Compare today’s top saving account rates and open one today!
Keep in mind that the interest you can earn with a high-yield savings account pales in comparison to what you can earn long term (e.g., when saving for retirement) by investing your money.
If you already have an emergency fund (good for you!) then start investing. Your 401(k) is a great place to start since you can get a match from your employer.
If you don’t have access to a 401(k) then consider starting with a robo-advisor, in which the funds you contribute are invested in pre-built, diversified portfolios according to your risk tolerance.
Here’s a list of robo advisors we recommend.
If you ultimately decide that you want more control over your portfolio, you can switch to an online brokerage, where you can make your own trades and custom build your own portfolio.
Bottom Line
Have you already reached the 20% target? Congrats! Now keep going. As long as you’re not depriving yourself today, it’s difficult to save “too much.”
Take the same advice I gave to those who are struggling to hit 20%: Test your limits, and try to increase them. Building up strength (either physical or financial) takes discipline and consistency, as well as a willingness to listen to your body (or your bank account) when it tells you your current regimen is just too intense.
Also, keep in mind that if your goal is to retire early or someday leave a well-paying but high-stress job, your saving rate will likely need to be 50% or more. This may seem impossible, but it might give you pause when making major financial decisions like deciding how much to spend on a house or car.
The most important thing is to start saving. How much will vary from person to person, as well as from year to year. In keeping with those sports metaphors, the best savings philosophy comes from Nike: Just do it.
Read more:
- How to Save Your First $100,000
- Are You Saving in the Right Place? Take Our Quiz to Find Out
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