Yes, saving money in life is important. It provides a sense of security and gives you the freedom to handle unexpected situations like emergencies, health issues, or financial setbacks. Saving also allows you to plan for the future--whether it's buying a home, starting a business, or enjoying your retirement.
Saving money and having an emergency fund can help you handle unplanned expenses and provide peace of mind — especially in uncertain times.
Pros and Cons of Saving
However, there are also some drawbacks to consider, such as missing out on potential higher returns from riskier investments. Savings can also lose purchasing power caused by periods of rising inflation.
Savings by age 30: the equivalent of your annual salary saved; if you earn $55,000 per year, by your 30th birthday you should have $55,000 saved. Savings by age 40: three times your income. Savings by age 50: six times your income. Savings by age 60: eight times your income.
The $1,000 per month rule is a guideline to estimate retirement savings based on your desired monthly income. For every $240,000 you set aside, you can receive $1,000 a month if you withdraw 5% each year. This simple rule is a good starting point, but you should consider factors like inflation for long-term planning.
“By the time you're 40, you should have three times your annual salary saved. Based on the median income for Americans in this age bracket, $100K between 25-30 years old is pretty good; but you would need to increase your savings to reach your age 40 benchmark.”
Saving is often most advantageous when the cost of borrowing—interest, annual fees, late fees, origination fees, and more—is higher than you are comfortable with. Generally, the higher the cost of an item, the higher the costs of borrowing will be.
When you don't save money, you miss out on compounding interest that increases your account balance over the long-term. If you're tempted to push saving off into the future, remind yourself that as your income goes up, your expenses tend to go up, too.
Those living paycheck to paycheck devote their salaries predominantly to expenses. The phrase may also mean living with limited or no savings and refer to people who are at greater financial risk if they were suddenly unemployed or faced another financial emergency.
“Individuals should limit the amount of money in savings accounts to the amount they need to live for two months as long as they can easily access their funds in a safe money market account that pays much higher interest,” said accredited financial counselor Camille Gaines, founder of Retire Certain.
Cash equivalents are financial instruments that are almost as liquid as cash and are popular investments for millionaires. Examples of cash equivalents are money market mutual funds, certificates of deposit, commercial paper and Treasury bills. Some millionaires keep their cash in Treasury bills.
While it is legal to keep as much as money as you want at home, the standard limit for cash that is covered under a standard home insurance policy is $200, according to the American Property Casualty Insurance Association.
CNN Money suggests that you start saving for long-term retirement goals in your 20s, as soon as you leave school.
Investing $500 a month can lead to significant long-term growth, thanks to the power of compounding returns. Whether you are just starting out or adding to an existing portfolio, consistently investing $500 each month can help you build substantial savings for future goals, like retirement or a down payment on a house.
It's our simple guideline for saving and spending: Aim to allocate no more than 50% of take-home pay to essential expenses, save 15% of pretax income for retirement savings, and keep 5% of take-home pay for short-term savings. (Your situation may be different, but you can use our framework as a starting point.)
Financial regrets are widespread.
77% of people have a financial regret, including 22% who regret not saving for retirement early enough, 18% who regret not saving enough for emergency expenses and 14% who regret taking on too much credit card debt.
Conventional wisdom says the poor do not earn enough money to save, but research proves that assumption wrong. Poor households can and do accrue assets and save over time.
Those consequences can range from going into debt, facing financial hardship after losing your job, and not being able to achieve your aspirations, like homeownership.
However, while it's important to focus on paying down debt, it can be equally important to devote money to emergency savings. In fact, 36 percent of U.S. adults are prioritizing both debt repayment and building emergency savings, according to Bankrate's 2024 Emergency Savings Report.
Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
They stay away from debt.
Car payments, student loans, same-as-cash financing plans—these just aren't part of their vocabulary. That's why they win with money. They don't owe anything to the bank, so every dollar they earn stays with them to spend, save and give! Debt is the biggest obstacle to building wealth.
“By the time you hit 33 years old, you should have $100,000 saved somewhere,” he said, urging viewers that they can accomplish this goal. “Save 20 percent of your paycheck and let the market grow at 5% to 7% per year,” O'Leary said in the video.
Invest in Dividend Stocks
To make $5,000 per month, you would need a portfolio of dividend stocks paying out at least a 5–6% dividend yield. For example, if you had a portfolio worth $100,000 paying out a 5% dividend yield, that would generate $5,000 in annual passive income.
If you choose to follow the 50 30 20 rule, you should aim to save 20% of your salary after tax each month. Once you have paid off any existing debts, this can then be split across your saving pots, pensions and any other investments you may have.