How Much Should You Save?

We all know we should save money: for emergencies, for retirement, for large purchases, you name it. But when do you know if you're saving enough? And how much is too much? (Yes, it is possible to save too much.)

There are as many answers to this as there are financial experts. Most savings guidelines are based on sound reasoning, and as long as you're able to choose a savings philosophy that fits your lifestyle and actually save something, that's a good thing.

Saving for the anti-bean counters: The 20 percent solution

For those who prefer rough guidelines to detailed budgets, there's a simple approach called the Balanced Money Formula, developed by Elizabeth Warren and Amelia Tyagi. This formula suggests devoting 20 percent of everything you earn to savings, 30 percent to "wants," and 50 percent to "needs." (MSN Money provides ahandy calculator for estimating what you should save and spend using these guidelines.)

Saving 20 percent of everything you earn is a good starting point, but that doesn't take into account any of the particulars of your living situation. Do you have debts to pay off? Kids to put through school? Did you get a head start with savings thanks to an inheritance?

Your savings needs are as unique as your lifestyle and goals. Going beyond the rule of thumb, you can solve your savings puzzle by answering some basic questions:

• What are you saving for? We're all saving for specific goals, be it financing retirement, purchasing a home, traveling abroad, putting our kids through college, or buying our next car. Naming your financial goals will help you figure out how much they're going to cost. If you have a partner or spouse, be sure to discuss these goals with them.
• How much time do you have to acquire the savings? If you're 50 and just now starting your retirement savings, you'll need to save a lot more than you will if you're starting at 25. The sooner you can identify your goals and begin working towards them, the more you can let time and compound interesthelp you.
• How stable is your income? Will you be able to save the same amount over a period of time? Do you foresee your income bouncing up or down sharply over the next few years? If you can anticipate big changes in your income, that may affect the rate at which you save now.

In addition to saving towards particular goals, we all want to have a solid emergency fund in a high interest savings account. How big that emergency fund needs to be depends on how much your day-to-day expenses are and how stable and secure your income is.

In every case, the sooner you start to save, the harder your savings can work for you. Taking the time to get the best interest rates on savings can shave months or even years off the time it takes to achieve a major savings milestone.

Once you've put a price tag on your savings goals, create an automated savings plan to quickly and easily grow your savings accounts. Online savings accounts frequently offer the highest interest rates and may let you create goal-targeted accounts. For retirement and college savings, seek out tax-preferred accounts like IRAs or 529 plans.

How much is saving too much?

Believe it or not, it is possible to save too much. If all your retirement accounts are fully funded, your kids' educations are taken care of, and all your debts are paid off, it might be time to loosen the strings a bit and have fun with some of your money in the here and now.

That's not a problem many people have. For most people, it's a struggle to save enough money to take care of future goals and keep our families secure. Working towards specific goals not only helps us stay on track with our savings plan, it can inspire us to make the sacrifices we have to make to provide for the future.

How much you save is intimately connected to those future goals. If you don't have kids, you don't need to save up to put them through college. If you've inherited a home--or if you don't plan to own one--you won't be saving for a down payment. On the other hand, if you have big goals like getting an advanced degree, traveling around the world or starting your own business, you may want to make long-term savings your highest priority and live frugally as possible in the present.

Whatever your savings goals, they're achievable with the right savings accounts and a commitment to your savings plan. Knowing what you want tells you how much you need to save to achieve it. From there, it's a clear, straight path to achieving your financial dreams.

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