Spending comes naturally for many of us. Saving, however, can take a little practice.

This article offers practical advice on how—and where—to save for three big goals: financial emergencies, college, and retirement. But the strategies it outlines can apply to many other goals, such as saving for a new car, a down payment on a home, the vacation of a lifetime, or launching your own business. 

Before you get started, it’s worth taking a look at any outstanding debts you have. It makes little sense to pay 17% in interest on credit card debt while earning 1% (or even lower in some cases) on a savings account. So 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 to put more into your savings.

KEY TAKEAWAYS

  • Employer-sponsored retirement plans like 401(k)s make saving for retirement easy and automatic, and some employers even match your contributions.
  • State-run 529 college savings plans let you withdraw money tax-free as long as you use it for qualified education expenses.
  • By tracking your expenses manually or with an app, you can find ways to reduce your spending and boost your savings.

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, medical bill, or both. An emergency or rainy day fund can also tide you over for a while if you lose your job and need to hunt for a new one.

How Much Should You Save?

Unless you’re already a big saver, your take-home pay is 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. Others say you should put away anywhere 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 of 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 and other volatile investments you have in a bear market.

Where to Park Your Cash

To access your money quickly in an emergency, the best place to keep it is in a liquid account, such as 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. If the account earns a little interest, all the better.

In most cases, these accounts will allow you to write a check, pay a bill online, or use an app on your phone. You can also move money by electronic wire transfer from your account to someone else’s when you need to do so. If you get a debit card when you open your account, you’ll be able to withdraw cash from an automated teller machine (ATM)


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Funding Your Account

Consider using all or part of any money you earn outside of your usual paycheck. That may be a tax refund, a bonus, or income from a side gig. If you receive a raise, try to contribute at least a portion of that to your account as well.

Another time-honored tip is to pay yourself first. This means treating your savings like any other bill and earmarking a certain percentage of every paycheck to go into it. To avoid the temptation of simply spending the money, consider direct deposit. Or you can have it deposited to your checking account and then transferred automatically to your emergency fund.

Saving for a rainy day is certainly easier said than done for many of us. For instance, someone who nets $50,000 a year would need to set aside anywhere between $12,500 to $25,000. If they devoted 10% to emergency savings, it would take two and a half years in the first instance and five years in the second, not counting any additional contributions or interest the account might earn.

If you ever need to take money out of your emergency fund, make sure you replenish it as soon as possible.

Saving for Retirement

Retirement is the single largest savings goal for many of us. But the challenge can be daunting. Fortunately, there are several smart ways to set money aside, many of them with tax advantages as an added incentive. Besides a bank or credit union savings account, 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.1

Employer-Sponsored Plans

The easiest, most automatic way to save for retirement is through an employer plan, such as a 401(k). The money comes out of your paycheck automatically and goes into whatever mutual funds or other investments you’ve chosen.

You don’t have to pay income tax on that money, on the interest, or on any dividends your plan earns until you eventually take it out. For 2024, you can put up to $23,000 a year into a 401(k) plan, which is an increase from the $22,500 limit for 2023.

If you're 50 and over, you can contribute an additional $7,500 (for both 2023 and 2024). As still another incentive, many employers will match your contributions up to a certain level. For instance, if your employer kicks in another 50%, a $10,000 investment on your part will be worth $15,000.23

The table below shows you how compounding works with your retirement savings, assuming you invest the full $23,000 every year and are guaranteed a 5% return each year.