Spending comes naturally for many of us, but saving can take a little practice. How and where to save requires strategies for best success whether it be for financial emergencies, college, or retirement. Your strategies and options can vary depending on what you're saving toward.
Start by taking a look at your outstanding debts. It makes little sense to pay 17% in interest on credit card debt while earning 1% on a savings account or even lower in some cases. Consider tackling the two in tandem, putting some money toward savings and some toward your credit balances. The sooner you can pay off that high-interest debt, the sooner you’ll have more to put into your savings.
1. Building Emergency Savings
The goal for most individuals and families should be an emergency fund that's large enough to handle serious, unexpected expenses such as a costly car repair or medical bill. A rainy-day emergency fund can also tide you over for a while if you lose your job and need time to hunt for a new one.
How Much Should You Save?
Your take-home pay is often a fair approximation of your monthly living expenses and it’s easily found on your pay stubs or bank statements. Financial planners commonly recommend setting aside at least three months of living expenses but others say you should put away between six months to a year's worth of expenses.
These figures work for retirees as well but it's always a good idea to make a few extra calculations. Consider all your monthly expenses and contrast that with your monthly income including Social Security, pensions, liquid assets, and investment income. You'll also want to factor in the risk associated with any stocks or other volatile investments you have in a bear market.
Where to Park Your Cash?
The best place to keep money you'll want to access quickly in an emergency is in a liquid account. This might be a checking, savings, or money market account at a bank or credit union or a money market fund at a mutual fund company or brokerage firm. All the better if the account earns a little interest.
These accounts will allow you to write a check, pay a bill online, or use an app on your phone in most cases. You can also move money by electronic wire transfer from your account to someone else’s account if you need to do so. You’ll be able to withdraw cash from an automated teller machine (ATM) if you get a debit card when you open your account.
Funding Your Account
Consider saving all or part of any money you earn outside of your usual paycheck. This may be a tax refund, a bonus, or income from a side gig. Try to contribute at least a portion of that to your account as well if you receive a raise.
Another time-honored tip is to pay yourself first. Treat your savings like any other bill and earmark a certain percentage of every paycheck to go into it. Consider direct deposit to avoid the temptation of spending the money instead. You can have it deposited to your checking account and then transferred automatically to your emergency fund.
Saving for a rainy day or emergency is easier said than done for many of us. Someone who nets $50,000 a year would have to set aside from $12,500 to $25,000. It would take two and a half to five years if they devoted 10% to emergency savings not counting any additional contributions or interest the account might earn.
2. Saving for Retirement
Retirement is the single largest savings goal for many of us and the challenge can be daunting. Fortunately, there are several smart ways to set money aside for this goal and many of them come with tax advantages as an added incentive.
There are individual retirement accounts (IRAs) for just about anybody. Tax-advantaged accounts include 401(k) plans for private-sector employees and 403(b) plans for employees of schools and nonprofits.
Employer-sponsored Plans
The easiest, most automatic way to save for retirement is through an employer plan such as a 401(k). The money automatically comes out of your paychecks and goes into whatever mutual funds or other investments you’ve chosen.
You don’t have to pay income tax on that money or your 401(k) gains or on any dividends your plan earns until you eventually take the money out. You can put up to $23,500 a year into a 401(k) plan in 2025, up from $23,000 in 2024. You can contribute an additional $7,500 if you're age 50 or older in both 2024 and 2025.2
Many employers will match your contributions up to a certain level. A $10,000 investment on your part would be worth $15,000 if your employer kicks in an additional 50%.
This table shows how compounding works with your retirement savings assuming that you invested the full $23,000 in 2024 and were guaranteed a 5% return each year.
