Over the last year, the personal savings rate among US consumers dropped from 26.6% in March 2021 to 6.2% in March 2022. This means Americans are putting a smaller percentage of disposable personal income toward savings†
Individuals may be limited in how much they can save amid recent high rates of inflation, causing the price of groceries, gas and other essential expenses to rise. in a New York Life Survey released in May, Americans report contributing $243.08 less per month to their savings due to anxiety about rising inflation. Respondents noted they were cutting back on saving for vacation, contributing to an emergency fund and paying off credit card debt.
But saving should be a key part of every financial plan, even in times of high inflation and market volatility.
What Percentage of My Income Should I Save Each Month?
You should strive to save 20% of your after-tax income each month.
Of course, this is a general rule and it isn’t always possible – especially when you’re just starting out.
Experts say every little bit helps, so start by saving what you can† If you’re saving 10% of your after-tax income now, work up to 20% by saving a percentage or two more each year. If you have debt, you can include student loan payments and payments on existing credit card debt as part of that 20%.
“Typically the range is between 10% to 20% of your after-tax income. As you hit milestones in life and age, your ultimate goal should be to get to 20%,” says Brent Weiss, a certified financial planner at Facet Wealth. “For my clients who have student loan debt, we do include paying that debt off because otherwise it is very hard for someone to save.”
this saving strategy goes hand in hand with a 50/30/20 budget, which suggests individuals dedicate 50% of their income to essential costs, 30% to discretionary costs and 20% to saving.
Savings By Age
Your exact savings rate will vary depending on your financial goals. Individuals participating in the FIRE movement – Financial Independence, Retire Early – often aim to save upward of 40% of their income, for example.
Here are target savings rates by age, according to Weiss :
|Retirement||12 to 15x household income|
To get a sense of where how you stack up compared with others in your age group, here are median and mean bank account balances by age, according to data from Bankrate:
Keep in mind that these ranges and amounts aren’t necessarily the best targets for your unique financial situation. Particularly as you get closer to retirement, consider speaking with a financial planner to ensure your savings rate will, in fact, allow you to reach your goals.
“You can say what the average American needs to retire, but it depends. There’s no one average person,” says Rob Williams, managing director of financial planning, retirement income and wealth management at the Schwab Center for Financial Research. “We would caution against putting a dollar amount target on something to have saved at a personal age. Focus on what you can control: how much of your paycheck you can save each month or year.”
How Can I Increase My Savings?
- Automate your savings. It’s easiest to save when you take the human element out of the equation. Set up automatic transfers from your checking to your savings accountor deposit that money directly from your paycheck into a savings account, and arrange automatic transfers from your paycheck to your retirement accounts.
- Avoid lifestyle inflation. Every time you get a raise or bonus, put that extra money toward your savings. If you typically receive a year-end bonus, plan to put that money toward a specific savings goal such as retirement or your child’s education to avoid the temptation to spend.
- Review your budget. To save more, you must either earn more or spend less. Take a look at your monthly spending and see which subscriptions, regular purchases or other costs you can eliminate.
Where Should I Keep My Savings?
Short-term savings should be kept in cash, high yield savings accounts or other low-risk savings vehicles. This category always includes your emergency fund, which should be kept in a highly accessible, liquid account.
When it comes to long-term savings, you have a bit more flexibility. Some savings goals, like retirement and your child’s education, can often be best met with a tax-advantaged fund such as the 401(k) or 529 plan, respectively.
Amid today’s period of high inflation, meeting with an advisor to determine the best savings vehicle could help you make the proper adjustments.
“Inflation isn’t something that can necessarily be prevented, but it does reinforce the need for emergency funds and a consistent review of a financial plan,” Joe Buhrmann, a certified financial planner and senior financial planning practice management consultant at eMoney Advisor, wrote in an email.
“People may find that they need to save more,” he says, “adjust their spending goals, adjust their investment portfolios or the types of accounts they’re saving in, or increase the size of their emergency fund to account for higher costs. ”