Spend less than you earn. Simple words to live by but not really anything that’s truly that helpful, you know? Any person getting started on their financial freedom journey likely starts by asking, “how much should I save a month”. Well, unfortunately for you, I have some bad news…
I don’t know.
Seriously, I really have no idea how much you should be saving each month. No idea at all.
I don’t know your age, your income, your spending, your goals, your current financial situation…I don’t know anything about you!
It’s called personal finance because it’s personal (another cliché you’ll hear a lot). But it really is true. Some people will say something like you should save 10% and you’ll be completely fine.
Well, if I’m a 50-year old with no savings and I want to retire at 60, should I only save 10%? NO! I likely will need to only spend 10%. It’s going to require some drastic effort to meet your goals.
If you’re an 8-year old planning for your future (major props!) then yeah, 10% might actually be a perfect number for you. But again, I just have no idea what you’re going to need to retire. Do you know what I do know, though?
I know myself. I know my goals. I know when I want to retire. I know my income. I know my spending. I know all of that. You need to know all of these things as well if you want to answer the question of “how much should I save a month?”
The very first thing that you need to do is determine your retirement number. Your retirement number is quite simply the amount of income that you need to be able to retire and be able to live the life you want to live, without stress, for the remainder of your life.
Maybe that means you’re going to go live like a world traveler and spending hundreds of thousands each year. Maybe it means that you’re going to downsize and live near family so you can watch the grandkids grow up. Neither option is better than the other – you just need to know what you’re planning to spend.
Admittedly, it is something that’s extremely hard to come up with. A very common rule of thumb that people have used throughout time is that if you retire, you can withdraw 4% of your savings every year and never run out of money. It might sound strange or hard to believe, but the data actually does prove that the 4% rule, works.
So, if you buy into the data, then you can back into the amount you need to save by thinking about what you might need to spend annually and then multiplying it by 25 (25 * 4% = 100%).
So, let’s pretend that you currently spend $48K every year. Maybe you bake in some inflation in there and then also think about how you want to go on some nice vacations. All in, you think that if you have $125K to spend each year then you’re going to be set for your retirement.
So, you take $125K * 25 = $3,125,000. That is your retirement number. If you have $3,125,000 when you retire, you can safely remove $125K each year and never run out of money. Sounds pretty dang nice, right?
Now that you have your retirement goal, you need to think about some of those other items that I listed.
I’m going to run through a theoretical example below to give you an idea of how the process would work:
- Current Age – 30
- Retirement Goal Age – 55
- Current Savings – $50K
- Risk Tolerance* – 8% Returns
- None – 0%
- Low – 5%
- Medium – 8%
- High – 11%
- You will really only get these returns by investing it into the stock market. I use 8% as a ‘Medium’ Risk tolerance because an S&P 500 ETF has returned 10-11% on average over the last century so after 2-3% inflation, you’re at about 8% returns on a real basis.
Now that you have this information, will go to Money Chimp for their compound interest calculator and basically back into the amount you need:
You can see that I added my current savings under “principal”, the years to grow and then the interest rate. The next step is to literally just guess how much you’ll need to save each year under the “Annual Addition” section.
Something that might be eye opening is if you put in what you’re currently saving now. Let’s say that you and your spouse are maxing out an IRA each year which is $12K total and then you’re also saving $5K for both of your 401K accounts.
To the normal person that might seem like you’re killing it! $22K in savings does sound really good, but is it going to allow you to meet your goal of $3,125,000?
Womp womp…you’re still over $1 million away from your goal! You need to really kick it into high gear.
So, how much do you need to save? This is where a little “guess and check” comes into play. Simply put in some random numbers until you hit your goal. Doing this, I found that $35,250 is the annual amount that will need to be saved each year to get to this amount.
Sounds pretty hefty, doesn’t it? Sure, that’s a big increase over what is currently being saved, but the thing is you’re finding this out now rather than 5, 10 or 20 years down the road. Another alternative to saving more is that maybe you decide you’d rather just keep saving the same amount but retire later in life.
Just change the years until you hit your goal but keep the annual addition at $22K:
You should hit this goal in 30 years meaning you would be 60. Maybe you hate that, maybe you’re ok with it, but that’s 100% a decision that only yourself and your spouse can truly make.
So, if you’re going to save $35,250/year then you need to make sure that you’re saving $2,937.50 each month. I know, that really does sound extremely hard and it is going to be hard but it’s not impossible.
The biggest piece of advice that I can give to you is simply to plan. Do exactly what you’re doing right now. Think about what you’re going to need in the future and aggressively start working towards that. Even if your retirement number isn’t exactly high, you’re going to be better off simply by estimating than if you were just saving a blanket amount each month.
Let’s keep going on with this scenario, though. You’re currently saving $22K and you need to get to $35,250, meaning you have $13,250 left that you need to save. What do you do?
Well, there’s many things that you can do. Here are a few that I immediately think of:
- Do you eat out everyday or pack lunch? $10 meal out to eat vs. $3 for a homemade packed lunch is $35 in savings/week or $1,750 annually assuming 50 weeks of work. If you need help finding cheap & healthy meals, I got you covered with some cheap grocery list tips.
- Do you have cable? Maybe you cut the cord and go to just Netflix? Savings of $75/month or $900 annually.
- Are you getting coffee at Starbucks every day? Brewing at home can easily save $100/month or $1200/year.
- Have you considered a side hustle? Doing something as simple as Uber/Lyft/Grubhub can make you $100/week in about 7 hours as I’ve heard the typical take-home pay is about $12-$15/hour. Might not seem like a lot, but $100/week is $5200/year.
- Are you spending money unnecessarily on stuff you don’t care about? Simply just try to budget a little bit more tightly with Doctor Budget. I guarantee you can find at least $25/week that you’re wasting money on which is a savings of $1300/year.
Doing those 5 things gets you an annual total of $10,350! Pretty dang close to your goal. There’s so many other small things that you can do as well such as not wasting your birthday/Christmas money on things but rather investing it. Or, when you get a raise, just save all of that extra money that you’re going to make.
It’s not going to be tough to make up that extra money but it really is just all about the effort you’re willing to put into it. I recently listened to a podcast where a couple chose to mow lawns on their weekends and they made about $300/weekend.
This meant that they were working 7 days/week but even if you do every other weekend, or just one day/weekend, you’re making an extra $150/week of $600/month. Do that for half the year during the mowing season and you’ve just made $3600 or 60% of your IRA contribution.
When it comes to saving and preparing for retirement, it’s not an all or nothing game. If you’re $13,350 short like I mentioned above, you don’t have to do one thing to make it up.
And if you can’t possibly get an extra $13K saved but you can get $10K, DO IT! That is still so much better than just not doing anything at all.
The question of how much should I save a month really can be answered by saying “as much as you need to comfortable and conservatively hit your financial goals”.
I know that’s not nearly as exciting as saying a true dollar amount, but it really does vary from person to person. I might be saving $500/month and you’re saving $1500, but I am on track for my goals and you’re not. It just depends on your goals.
Truthfully, blog posts like this are some of my favorite ones to write because I really think that if people can take 10 minutes out of their day to go through this process as I have shown you today, it can literally change your life.
Can you imagine if that person that was investing $22K just kept doing that over and over for 5 years before updating their strategy? They would be in a really, really bad situation!
At the end of those 5 years, they would now have $212,856.84:
Do you know what they would need to save for the remaining 20 years? Take a guess.
Over $43K. Annually.
Do you see why the time is such an important piece of the plan? This couple could either save $35,250 for 25 years or $22,000 for 5 years and then $43,160 for 20 years.
$35,250 * 25 years = $881,250 for the actual cash that they have to save while the other method is $22,000 * 5 years PLUS $43,160 * 20 years for a total of $973,200.
So, by this couple simply not planning and being aware that they were missing their goal, they cost themselves nearly $92K in the amount that they have to save to end up at the same point.
I don’t know about you, but $92K is a big freaking deal and could buy some pretty nice vacations throughout the years…
So, in summary, just don’t blindly save. Don’t blindly listen to people say that you should save 10% or 25% or any percent. Don’t do anything blindly at all.
Take 10 minutes and do these three steps:
1 – find your retirement number
2 – make sure you’re saving enough to hit that
3 – if not, evaluate all possibilities to get closer to your essential monthly savings
If you are willing to take the time to just freaking plan, you’re going to be so much better off than so many other people out there.
I know that this is tough for people but you need to do it. I feel myself getting preachy but I feel like our educational system has failed us by teaching us things like geology and art but not how to understand compound interest or to use a budget.
I’m not slandering you if you’re a geologist or an artist, but let’s be honest – most of us are not. But ALL of us should know how to live within our budget and not overspend.
One common pitfall that I would always fall into is that when I had extra money at the end of the month, I’d blow it. Don’t be like me. Saving money straight from your paycheck really is easy to do, especially with these three simple money saving methods!