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How Much Should You Save Each Month?

Try investing

If you can't save a good chunk of your paycheck every month, investing once now can help you start saving in the long run.

A favorite investing platform is Betterment, where your money will be automatically invested in index funds. Betterment's fee is a straightforward 0.25 percent of your total portfolio.

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How Much Should You Save Each Month?

How Much Should You Save Each Month?

https://www.moneyunder30.com/percentage-of-income-should-you-save-every-month

moneyunder30.com

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Key Ideas

How much you should save every month

The popular 50/30/20 rule states that you should reserve 50 percent of your budget for essentials like rent and food, 30 percent for discretionary spending, and 20 percent for savings.

But it's not that simple. If you're a high earner, you'd be wise to save a larger percentage of your income. If 20 percent is impossible for you to save, then saving something is better than saving nothing.

Why 20 percent is recommended

Assuming you're in your 20s or 30s and can earn an average investment return of five percent a year, you'll need to save about 20 percent of your income so you can reach financial independence when you're older.

Financial independence means that you can maintain your chosen lifestyle entirely from the interest of your investments and dividends.

The four percent rule

The four percent rule states that you could withdraw four percent of your principal balance every year and live on this indefinitely. That means you need to save 25 times your annual expenses to become financially independent.

The four percent rule is not perfect. There is no risk-free investment that yields that much today. Sudden inflation could also cause a problem.

How long it will take you to save enough

How long it will take you to amass 25 times your income is based on the percentage of your income you save.

When you save 20 percent of your income, assuming a five percent average annual return, you'll hit 25 times your yearly income in just over 40 years.

Tax-advantaged accounts can help

You can take advantage of the tax-sheltered retirement accounts like 401(k)s and IRAs.

  • If you qualify for a Roth IRA, use it. The Roth IRA will come back to you tax-free when you're older.
  • If you contribute to a 401(k) account, at least 5 percent will be matched from your employer. This means you'll only need to save 15 percent of your paycheck. The money you put into a 401(k) will be deducted from your paycheck before taxes.

When you can't save that much

If you cant save 20 percent, you are not a failure. While everyone should aim for 20 percent, not everyone will hit the target on their first try.

Start small. Start with 1 percent. Slowly increase. Aim for higher, but if it leaves you stressed, scale back. However, keep the 20 percent goal in mind. When you get a raise, increase your saving rate.

Try investing

If you can't save a good chunk of your paycheck every month, investing once now can help you start saving in the long run.

A favorite investing platform is Betterment, where your money will be automatically invested in index funds. Betterment's fee is a straightforward 0.25 percent of your total portfolio.

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