How to Save Money for Your Big Financial Goals

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.

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).

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.

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.

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.

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.

No 401(k)? No Problem!

If you’re fortunate enough to have even more than the 401(k) maximum to set aside for retirement or if you don't have an employer-sponsored plan available, consider an IRA. You can invest in either the traditional variety, where you get a tax break when you put money in, or a Roth IRA, where the money you withdraw someday can be tax-free.

Saving for College

College may be the second biggest savings goal for many of us. And just like retirement, the easiest way to save for it is to do so automatically.

529 Plans

Each state has its own 529 plan and, in some cases, several. You don’t have to use your own state’s plan, but you’ll generally get a tax break if you do.

Some states allow you to deduct your 529 plan contributions, up to certain limits, on your state income taxes and won’t tax the money you take out of your plan as long as you use it for qualified education expenses, such as college tuition and housing.

The federal government doesn’t offer any tax breaks for the money you put in, but, like the states, won’t tax the money you take out as long as it goes toward qualified expenses.

Contribution Limits

How much you can contribute to a 529 plan depends on your state. While there are no annual contribution limits, states may put lifetime caps on how much you can put into their 529 plans. For example, a 529 plan balance in New York can’t exceed $520,000 for a single beneficiary.

You can also use a 529 plan to pay up to $10,000 a year in tuition at an elementary or secondary public, private, or religious school. Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, a lifetime limit of $10,000 from a 529 plan can be used to pay off student loans.

Saving for Life Goals

Most of us are likely to have more than one savings goal at any given time, and a limited amount of money to divide among them. If you find yourself saving for your retirement and a child’s college at the same time, one option to consider is a Roth IRA.

Unlike traditional IRAs, Roth IRAs let you withdraw your contributions (but not any earnings on them) at any time. You may have to pay a penalty for early withdrawals, so be sure to do your research if you're under 59.

This means you can use a Roth IRA to save for retirement, and if you come up short when the college bills arrive, tap into the account to pay them. The downside is that you’ll have that much less money saved for retirement when you may need it all the more.

For 2024, the maximum allowable IRA contribution (for traditional and Roth IRAs combined) is $7,000. People 50 and older can contribute an additional $1,000 catch-up contribution, which hikes the limit to $8,000. This is an increase from the 2023 limit of $6,500 or $7,500 if you're 50 and older.

Tips for Saving Money

If you need to save more money than you can easily pry out of your paycheck, here are a few ideas that financial planners often suggest to consumers.

1. Manage Your Spending

People often find they’re frittering away funds on things they don’t need and could easily live without. Record every penny you spend for a certain period of time, whether that's a week or a month. You can use a notebook or an expense-tracking app, such as Clarity Money or Wally.

Some apps even save for you. For example, the Acorns app links to your payment card, rounding up your purchases to the next dollar, and moving the difference into an investment account.

2. Consider Cash Back

As long as you buy things you truly need, it may make sense to sign up for apps such as Ibotta or Rakuten. Apps like these offer cash back from retailers on groceries, clothing, beauty supplies, and other items.

You can also use a cash rewards credit card, which offers 1% to 6% in cash on each transaction. For instance, the Chase Freedom card offers 5% cash rewards on categories that change periodically. This tactic only works if you transfer your savings to a savings account and always pay your credit card bill in full every month.

3. Focus on Major Expenses

Clipping coupons is fine, but you’ll save much more money by paring back on the biggest bills in your life. For most of us, that’s things like housing, insurance, and commuting costs. Ask yourself the following questions:

• If you have a mortgage, could you save by refinancing it at a lower rate?
• Could you shop around for lower premiums or bundle all your policies with one carrier for a discount?
• If you drive to work, is there a cheaper alternative, such as carpooling or working from home once a week?

4. Don’t Go Overboard

You might want to dine out less often, try to get a few more wearings out of your wardrobe, or drive the old car for another year. But unless you enjoy living like a miser—and some people actually do—don’t deny yourself every last pleasure in life. The point of saving money is to build toward a financially secure future—not to make yourself miserable in the here and now.

The Bottom Line

Saving money is crucial for a secure financial future, one that involves little debt and allows you to live comfortably and build wealth. As life progresses, there are many important situations that require spending, such as paying for school, a house, your child's schooling, and retirement. Utilizing a variety of saving strategies for each different occasion will allow you to approach these expenses from a prudent financial standpoint.