How Much Should I Save Each Month vs. Put Toward Debt?
Knowing how to balance growing savings and paying off debt can help you reach your financial goals.
Contributing Writer at Tally
September 23, 2021
What keeps you awake at night? Things that go bump in the night, or emergencies that drain your checkbook?
Whether you’re saving money each month or not, the fear of not saving enough can be overwhelming. How much of a savings cushion is enough, and what kind of savings goal should you implement? On top of these anxieties is debt repayment, which may play a role in your personal savings goals.
So how much should you aim to save?
Between 2015 and 2020, the national savings rate hovered around 7%. This figure spiked briefly during the pandemic, as workers saved by cutting down on expenses, such as those associated with commuting to a job. Currently, this dip has receded, and the average savings rate is around 10%.
We're here to answer the question, "How much should I save each month vs. how much should I put toward debt?" Though each person's personal finances are unique, we hope that this article serves as a guide, providing high-level principles that you need to help you get things moving in the right direction.
How much should I save each month?
As a rule of thumb, your savings rate should be 20% of your net income. It also meets the "50/30/20" budgeting rule, which calls for people to spend 50% of their monthly income on needs, such as household living expenses, 30% of their net income toward wants and the remaining 20% for savings or debt repayment.
Your net income is the amount of money that you make after taxes. For instance, a salaried employee earning $60,000 per year would have a take-home pay of roughly $45,000 after federal and state taxes. When divided by 12, the monthly net pay would be roughly $3,750. Based on the 20% rule, they should be saving $750 monthly.
As mentioned, each person's financial situation is unique. For instance, if you start saving early, you may be able to save a little less since you'll end up saving more over time with interest. Plus, investing your money early allows it to grow, so you may be able to afford to be less aggressive with your monthly savings rate.
On the other hand, if you’re older and worried about retirement accounts, you may need to save more aggressively to meet your target retirement age.
Similarly, if you haven’t established a rainy day or emergency savings account, you may aggressively chase this goal. The emergency fund should generally have enough to cover your monthly expenses for half the year. A rainy day fund should have roughly $1,000 in it.
These accounts provide cushions to help cover unexpected expenses. With cash on hand, you can avoid covering these expenses by taking on debt. So, if you don't have an emergency fund set up, you may need to save money at a higher rate than 20%.
In summary, your personal savings rate should be determined by both your short-term and long-term goals. But, aiming to save 20% of your net income is an excellent place to start and could help improve your financial situation.
How can I accelerate my savings rate?
There are a few things that you can do to help accelerate your savings rate. Below are some tips to help get you started.
Creating a savings goal
Consider setting a savings goal for the year. For instance, if you want to save $6,000 in a year, you’ll need to save $500 a month, or about $115 a week.
You can build these savings targets directly into your budget. Making savings a priority, and considering it a necessity rather than a luxury, will go a long way toward helping you get started.
If money from your paycheck never touches your checking account, you won't be able to spend it. Try setting up automatic contributions to make savings effortless. For example, if you’re paid on the first of each month, set up automatic withdrawals to fund your savings account on the same day.
Doing this eliminates "debating" that can come with manual saving. The money is already saved. Your remaining funds can cover your expenses and discretionary spending.
Taking advantage of tax-free growth
Your employer may offer a Roth 401(k) or you can open a Roth IRA independent of your employer. Roths are advantageous because your earnings grow tax-free. Your contributions are considered net contributions, which means you don't get to take a tax deduction. But you don’t pay any taxes on your earnings, as long as you don’t withdraw contributions early.
Roths are one of the long-term savings options for a retirement plan. Health Savings Accounts are a similar option, as those earnings also grow tax-free. But, your employer needs to offer them, and you may need to have a high-deductible health insurance plan to gain access.
Using employer matches
Many employers will match contributions to investment accounts up to a certain amount. As an example, an employer may match contributions you make to a 401(k) up to 4%.
Essentially, this is extra money that your employer is giving you. If possible, make your minimum contribution to your employer-sponsored investment accounts maximize the matching contribution your employer is willing to make.
Your employer’s match should not factor into your 20% target savings goal. The 20% goal should be from your personal net income.
Employer matches aren’t factored into your paycheck, so you shouldn’t consider them in your 20% savings rate. Instead, view them as icing on the cake. The same could be said if your 401(k) contributions are based on pre-tax dollars.
Building a portfolio properly
Different accounts have different rates of return. For instance, putting your money in a high-yield savings account with a high compound interest rate will improve your savings more than if you left your money in a standard checking account.
However, leaving your money in a bank account may have you missing out on potential gains compared to putting it in a brokerage account. But, bank accounts are less risky than the market, so this may not be the best strategy if you're a bit older and wondering how to handle your retirement savings. A trusted advisor can help you strategize and make wise financial decisions, such as where you should park your extra cash.
How much should I put toward debt each month?
The 50/30/20 rule calls for 20% of your net pay to go to either savings or debt payoff. Sticking to 20% is a safe bet for your savings plan, but some monthly payments to lenders may be accounted for in the 50% category. For instance, your mortgage and your car payment could be categorized as essentials.
If you're looking to save aggressively, consider categorizing other debt repayments as "essential" as well. If you keep your savings goal at 20% of your net income, you can build things like credit card debt into your 50% essentials category. This may cause this number to creep up a bit higher than 50%, which means you'll need to cut down on your 30% discretionary spending category.
So, to answer the question, try to put as much toward debt as you can afford while also maintaining a 20% savings rate. Getting out of debt will free up cash, allowing you more financial flexibility.
How can I accelerate my debt payoff?
If you're looking to accelerate debt payoff, you may want to consider options like debt consolidation loans or balance transfers. Both of these allow you to refinance your current interest rate to help make it easier to pay off any existing debts you have with higher interest rates.
The sooner you can start saving money, the better
Getting started saving can be challenging, especially if you carry debts and are unsure where to begin. The bottom line is that the earlier you get started, the better off you will be in the long term. Even putting your money in an online savings account can help you in case of an emergency, as you won't need to take on debt to cover unexpected costs.
As a rule of thumb, you should aim to save 20% of your net income. If possible, this figure should represent only money saved. Any debt payoff should come from elsewhere in your budget.
Remember that each person's financial situation is unique, and what works for one person may not necessarily work for another. Speaking with a trusted financial advisor can help when planning future financial goals.
You can also consider a credit card payoff app like Tally†. Tally automatically pays down your existing credit card debts efficiently, making it a useful tool for savers looking to gain an edge.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.