How the calculation works
Each month your balance earns interest and your deposit is added. With a monthly rate r (from the APY) and n months, the deposit needed to reach a goal is:
Monthly deposit = (Goal − Savings × (1+r)^n) × r ÷ ((1+r)^n − 1)
To reach $20,000 in 24 months, starting from $2,500, at 4% APY the monthly rate is about 0.327%. The $2,500 grows to about $2,704 on its own, and a deposit of about $694 a month, with the interest it earns, covers the remaining $17,296.
Where to keep savings
- High-yield savings accounts at online banks pay close to the Fed funds rate, much more than the 0.4% national average for savings accounts. Deposits are FDIC-insured up to $250,000 per bank.
- Money market funds pay similar rates and suit larger balances. They are not FDIC-insured, but government money market funds are very low risk.
- CDs and Treasury bills lock a rate for a fixed period, good for goals with a fixed date. T-bill interest is exempt from state income tax.
- In the UK, easy-access savings and cash ISAs play the same role; ISA interest is tax-free.
For goals more than five years away, a mix of stocks and bonds has historically grown faster, at the cost of ups and downs along the way. See the investment calculator.
How big should an emergency fund be?
A common guideline is three to six months of essential expenses: housing, food, utilities, insurance, transport and minimum debt payments. Aim for the higher end if your income is irregular, you are the only earner or you work in a cyclical industry. Keep it somewhere safe and instantly accessible, not invested in stocks.
Make it automatic
People who save by automatic transfer on payday save far more consistently than those who save what is left at the end of the month. Split the monthly figure across paychecks, or use the weekly and daily numbers above to make it feel smaller.