This article was originally written for & published on Forbes
Most of us know it’s important to save, and understand saving money for the future is a critical action step to achieving goals, being able to retire, and building assets.
But things quickly go from the very obvious to rather uncertain when you start talking about how much you need to save each month.
Determining how much you need to save to meet your goals and enjoy financial security is difficult because rules of thumb can only get you so far. Your “enough” might be someone else’s “far too much,” or “nowhere near adequate.”
Thankfully, there’s a simple guide and system that I use as a financial planner, for both my own personal finances as well as my clients’. I’ll share it with you, too, to help you feel more confident about your own numbers.
The Baseline Amount To Save Each Month
I won’t bury the lede here: the amount of money I recommend my clients save is 20 percent of gross income.
And that’s a baseline; a starting point. For higher-earning clients who have very big financial goals (like financial independence in their 40s or 50s), I may recommend saving 30 to 40 percent of income.
But for now, let’s just talk about saving 20 percent — because that’s a lot on its own!
I won’t pretend that this is easy and anyone can do it. Saving 20 percent of your income is a challenge. It’s hard, it takes effort, and it requires a dedication to long-term goals and priorities.
Just because it may be difficult to achieve, however, is not a reason to shy away from it. If 20 percent sounds impossible to you, start with 10 percent. Then, periodically raise the target — even if it’s just by 2 percent at a time.
Use Percentages, Not Dollar Amounts
The reason I suggest 20 percent is because it allows you to build savings relative to your income. And with personal finance, everything is relative.
So, for example, if you earn $50,000, then a great goal for you is to try to save $10,000 in a year. If you earn $75,000 and want to save 20 percent, then that target automatically accounts for your higher income; you can aim for $15,000 saved in a year.
The more you earn, the larger the dollar amount gets. Households making $200,00 per year, for example, ought to be able to put away $40,000. Earning $300,000? That minimum recommended savings number rises to $60,000.
Why The 20 Percent Rule Provides A Good Baseline (Or Goal To Target)
Suggesting 20 percent is a bit arbitrary, in terms of the amount. 15 percent may be fine for you, or you might be someone with big goals who really needs to save 30 percent minimum.
In my financial planning firm, we’ve settled on 20 percent because that provides higher probability of long-term success than the traditionally-suggested 10 or 15 percent of income, but leaves most people with enough income to manage fixed costs and also enjoy a little bit of discretionary spending so they can enjoy life now while they plan responsibly for the future.
20 percent is a good baseline to aim for or start with — but do note that the exact percentage that you need to save will largely depend on the specific goals you have or the future lifestyle you want to be able to afford.
Once you’re consistent with your savings habits, consider talking with a fee-only, certified financial planner who works as your fiduciary 100% of the time to confirm you’re on a good track for the future, based on what’s most important for you to enjoy in your life now and in the future.
Remember That Saving And Investing Are Two Different Activities
So far here, we’ve used the idea of “savings” and “investments” fairly interchangeably — but technically, that’s misleading. These are two very different functions.
For the purposes of this specific conversation, when we talk about savings rates, keep in mind that we’re talking about the money you contribute to vehicles capable of providing long-term growth of your assets. In most cases, that means investment accounts.
This could be your retirement accounts like IRAs and 401(k)s, or it could be a taxable brokerage account where you hold a diversified portfolio of various securities like stocks and bonds.
Of course, there’s a whole world of investments out there. You don’t have to limit yourself to just these vehicles, but these are fairly standard and are a smart place to start when you’re working on accumulating assets.
(You can dip your toes into more speculative investments if you want — but that should be in addition to what you’re contributing to achieve something like a 20 percent savings rate, not a replacement for it.)
What we don’t mean here is money you put into a savings account at a bank, where it then sits in cash. Your “annual savings rate” should be made up of dollars that are going to work for you, and money can’t work hard in a bank account because it can’t earn significant returns for you there.
That’s why there is such a thing as having too much money in cash. You face inflation risk this way, which can erode the purchasing power of your cash over time.
Keep in mind that you need to not only set aside 20 percent or so of your income… but you also need to invest those funds for long-term growth. You may also need to save additional money on top of these contributions for things like short-term goals — and those funds may need to sit in cash if you plan to use that money in 5 years or less.
Do You Need To Save On A Monthly Basis? Actually, No
Using this rule also allows you to set up your savings system however it works best for you in terms of when you save. You can break that down monthly, which is likely a good idea if you’re a W2 employee and earn a steady and predictable income.
If you earn $100,000 through a salaried job and bring home the same amount every paycheck, then you can take your annual savings target ($20,000) and divide that by 12. That will give you the amount you can set up as an automated contribution to a savings or investment vehicle (in this case, about $1,667 per month).
Or, you can look at the numbers on an annual basis, which can make more sense if you earn bonuses or commissions throughout the year, are self-employed, or receive lump sums of cash through the sale of equity compensation when your grants or options vest and you can sell shares.
It may be harder to automate when you’re working with an irregular cash flow like this, but as long as you’re disciplined about setting aside the appropriate amount of money from these periodic inflows and contribute them to your long-term savings goal, you should be able to hit your target.
The important thing is that you accomplish your goal, and focusing on either steady monthly progress or making big-lump sum contributions can both work.
Like so much else in personal finance, the right option for you will likely depend on the nature of your cash flow. Consider your options, and then select the system that is most in sync with the specifics of how your finances work to save the right amount to hit your biggest goals.
Want more financial advice you can actually use? Check out Beyond Your Hammock, a fee-only financial planning firm that specializes in helping 30- and 40-somethings get clarity and start building wealth.