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How Much Should I Save Each Month?

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It’s a question we are often asked by people who are still working, yet dreaming of a comfortable retirement. Each person has their own unique goals, priorities, and income potential, and there is no consensus about how much Americans should aim to save and invest from their paychecks. However, research has been conducted and published by many groups.

One of my favorite formulas is a fairly simple one. It’s called the 50/30/20 Financial Guideline. 50/30/20 was developed and encouraged by Elizabeth Warren after she focused her work on the bankruptcy culture in America. The premise is simple for those earning W-2 wages from an employer, although it becomes a bit more complex for those of us that are self-employed. 

The guide states that 50% of your take-home pay should be spent on “necessities”. 30% of your net pay should be spent on things you “want”, and the remaining 20% of your take-home pay should be saved and invested. I’ll ignore for the moment that we are fans of “pay yourself first”, and would prefer this to be called the 20/50/30 spending guide. 

What are considered necessities? It may be different for everyone, but here are some items listed on the FiftyThirtyTwenty website:

50% Necessities:

  • Mortgage / Rent
  • Utilities
  • Health Care
  • Groceries
  • Transportation
  • Childcare

30% Wants:

  • Entertainment 
  • Dining out
  • Personal care
  • Shopping 
  • Travel

20% Saving/Investing:

  • Emergency Savings Account
  • 401k / employer-sponsored retirement plan
  • Health Savings Account
  • Roth IRA

So if a typical family brings home $5,000/month after-tax, here is how it should be broken down:

  • Necessities: $2,500/month (all housing, transportation, groceries, healthcare, and childcare)
  • Wants: $1,500/month (shopping, dining out, travel, entertainment)
  • Saving/investing: $1,000/month (401k to the match, debt reduction, HSA, Roth IRA)

In America in 2020, many people are living paycheck-to-paycheck, and it’s not because of the 20% they are putting toward saving and investing. In my experience, it is often that the lines between wants and needs are constantly blurred. We are a consumer culture – having been taught for decades by the best minds in sales and marketing. In fact, 40% of Americans could not cover an unexpected expense of $400, and 31% do not have any retirement account or pension.1

$2,500/month for groceries, gas, housing, and healthcare does seem tight; and I’ll admit on the left coast it is. But rather than steal from the 20% saving/investing bucket to add to “needs” spending (because let’s face it, needs often creep above 50% of take-home pay for many of us), people can use some of the 30% of after-tax income designated for their “wants”. $1,500/month toward discretionary spending seems overly generous – as most people don’t need a new pair of Nikes every month. It feels like I could plan a monthly getaway to Vegas using less than that $1,500, especially since Disney+ only costs $6.99/month!

When I first began advising clients, I would often tell young people to plan to save $1,000/month. Lots of eyes popped out of heads, and many were rolled. But the reality is that we are living longer, wanting to quit the rat race earlier, and for most of us pensions are a relic of the past. 

We all need to take personal responsibility for our own future, and saving 20% of your income is a great first step. We can do one better with a personalized financial plan based on your goals, priorities and personal situation. Similar to the 4% rule for retirement distributions, a 20% saving rate is a good “rule of thumb”. We like to provide rules of thumb to stimulate thinking, but then help our clients reach their goals using an effective, efficient, and dynamic personalized financial plan.

1. Federal Reserve Report on the Economic Well-Being of U.S. Households in 2015, May 2016