Sometimes it feels like it's impossible to get a straight answer for your most basic financial questions — like how much money you should have in your savings. It seems simple, no? But if you've ever asked about it, odds are that you didn't get a simple answer. Maybe you got a reply involving complex buzzwords that no one bothered to explain to you. Or you might have just gotten a stern "As much as you can," accompanied by a wary glance (this is a favorite reply among parents when you're living in their house, eating their pizza, and monopolizing their DVR).
It's tough for people to give you a straight answer on questions like this because, well, most people don't actually know the answer — and because money is a pretty emotional issue, one that many of us approach with fear instead of logic. For example, my own fear that I'd never save enough money led me to spend most of my twenties embracing a method of financial planning called "never checking my bank account and hoping that somehow everything turns out OK."
If you are currently practicing this method, you know that it is crazy stressful. While you're trying to put the idea of money out of your mind, it creeps back in at really inopportune times, like when you're in a meeting at work, or trying to masturbate really quickly before your roommate gets home. But figuring out how much money to save is not actually that hard or scary — determining the right answer for you is pretty easy to do, once you have the facts.
So let's all chill out, figure out exactly how much you need in savings, and move on with our day. Hey, your roommate will still be out for another hour!
So, How Much Should I Actually Have In My Savings?
OK, remember that time when I said figuring this out was super simple? Like, in the last paragraph? I was lying! Kind of! Sorry! But I had a good reason: there are three different major kinds of savings goals you might want to think about, and they all require different amounts of money.
1. Emergency Savings
This is probably the most important kind of savings. Saving for your retirement or a house is very cool, but saving for your emergency fund is necessary. Your emergency savings are to dip into when you lose your job, your rent gets suddenly jacked up, you need emergency car repairs — basically, when the sh*t starts hitting the fan for real. The general rule of thumb is that emergency funds should cover three to six months worth of your living expenses.
How do you figure out your living expenses? You can add up the cost of all the necessities you pay for in a month — rent, utilities, food — and work from there, or you can just estimate based on your monthly take-home pay, and save based on that.
So if you did all the math and found that you need around $2,000 a month to survive, you want to prioritize getting $6,000 in your emergency fund. There's no need to get ahead of yourself thinking about stockpiling six months worth of expenses yet — get the three months saved, and then you can start thinking about what you'd need to do in order to save more.
2. Retirement Savings
Retirement savings is money you're putting away for when you're older; this money is typically saved in an account called an IRA or a 401(k). These savings accounts aren't the same as a regular savings account that's tied to your checking account; they're investment accounts that involve stocks.
A 401(k) is a retirement savings account that you get through your job — usually your job will help you set up this kind of account by offering to take a specific percentage of your paycheck that you've determined, and put it directly into your 401(k) each pay period. This is cool because the money will be drawn from your pre-tax pay (so you're not even paying any taxes on it), and also because you won't even really notice that it's gone, especially if you set up your 401(k) before you get your first paycheck.
An IRA is similar to a 401(k), but it's for people who don't get a 401(k) through work — so you have to set up and put money in this account yourself. There are a lot of financial bonuses that come with putting money in an IRA, too — since the government would really like you to save for retirement, you save money on your taxes when you put money in your IRA (as opposed to just leaving it in a plain old savings account or spending it).
Unfortunately, unlike emergency savings, retirement savings aren't the kind of thing where you can save a certain amount of money and then be done with it. The actual financial end goal in retirement savings is so astronomical, it's basically impossible to envision (though you can mess with some online retirement calculators if you really want to know exactly what you're reaching for). Retirement savings is more about committing to saving a general amount of money on the regular, and knowing that it will eventually add up to something you can live off of when you're older. Experts recommend that you save 10-15 percent of your salary for retirement each year.
3. Goal-Oriented Savings
Saving for a specific goal is exactly what it sounds like: throwing money in a savings account as part of a dedicated effort to afford something specific — like a house, a car or a backpacking trip through Australia. Odds are, this is probably the least important kind of savings for you to think about right now (though it certainly is easier to save money for a concrete goal that you can picture than for something nebulous like "when my life is a mess" or "when I am an Old.")
How Much Money Should I Save Each Month?
A lot of experts recommend you abide by something called the "50/20/30" rule of budgeting — meaning that, ideally, 50 percent of your earnings each month should go to the things you need to pay for right now (rent, groceries, car payments), 30 percent should go to the things you want to pay for right now (nice restaurant dinners, evenings out at the bar, fake fur coats that you're pretty sure you're only gonna wear twice), and 20 percent should go to paying for your "financial priorities," which could mean paying off student loans or credit card balances, or adding to your savings accounts.
So, let's say your monthly take-home pay is $2,000. If you go by the 50/20/30 formula, you should earmark $400 of that each month for savings. Easy-peasy, right? Why was everyone making this so complicated?
For some of you — say, if you don't have any debt — it may actually be that easy. But if you have debt, the picture becomes a bit more complicated — and figuring out exactly where that 20 percent needs to go can feel a little intimidating.
How Do I Figure Out What To Save Money For First?
Odds are pretty high that 20 percent of your salary will not be enough to pay off your debt, build your emergency savings, and add to your retirement account each month. "How do I save up three months of living expenses but also pay off my debts and also save 10 percent of my pay on a mere $400 a month?" you may be saying to yourself, as your head begins to emit small sparks and prepares to explode.
Here's the thing: the real savings goals to focus on first are getting some cash in your emergency fund, and staying on top of your debts. As financial expert Tonya Oliver-Boston told Learnvest, "Emergency savings and payments on high-interest debt tend to fight for first priority,” with retirement savings coming in third. You can personally figure out which ones to focus on — if you have nothing to fall back on if you lose your job, you may want to focus on your emergency fund; if you know you could always move back home or get a loan from your family if things got dire, you may want to focus on paying off your loans.
You ideally still want to sock away a little money for retirement — again, retirement is a long game, so it's about just adding money again and again over the long term. But not being able to save 10 percent of your money for retirement right now doesn't make you a failure as an adult.
This Was Really Fun And All, But Seriously, How Much Money Should I Have In My Savings?
OK, fine, twist my arm. Using all the formulas above, we could say that if your take home pay is $2,000 a month, your starter savings goal could be saving $6,000 in emergency funds and saving a minimum of $2,400 to $3,600 in your IRA this year. If you can save more than this, great! If you can't save this much, don't worry — you're not going to vanish into a puff of irresponsible smoke.
There are very few financial situations where there's a single right answer for everyone. The important thing is to actually think about your finances, not be afraid of them, and actively take charge of them — not just ignore them and hope everything fixes itself. That didn't work for that weird stain on your bathroom ceiling, so why would it work for your money?
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