While many people have heard about rules of thumb for savings rate—for example, that you should save 10% of your salary—they have not taken the time to calibrate their savings rates to factor in their own situations: their incomes, how much they have managed to save so far, their proximity to reaching retirement (or any other financial goal), and the return they can expect to earn on their investments. A 10% savings rate is better than nothing, but it is not going to be enough in many cases. (Unfortunately, most people are not even coming close to 10%: The average personal savings rate in the U.S. was 3.5% in August 2022, according to the U.S. Bureau of Economic Analysis.)

By using your own financial goals to formulate concrete savings targets—and periodically revisiting them to take into account changes in income, expected market returns, or proximity to the goal date—you have a better shot at reaching your financial goals than if you fall back on rules of thumb. Rather than setting a savings rate in a vacuum, start with the amount that you will need to amass for a given goal, then work your way backward to determine how much you will need to save on an ongoing basis. Here are the key steps to take.

Step 1: Identify and prioritize goals
The first step in the process is to take a close look at what financial goals you would like to achieve, factoring in your wishes as well as what makes sense from a financial/return on investment perspective. Even if you have not spent much time on goal-setting, you can do a quick and dirty version right now. List your financial goals—short-, intermediate-, and long-term, and rank from highest to lowest priority. Do not forget to include debt pay down as a goal, especially if you have high-interest-rate debt on your household balance sheet; paying down that debt should be right up near the top of your list. Building an emergency fund should also be toward the top of the priority pyramid for all investors.

Step 2: Quantify goals
If a goal is very close at hand—for example, you would like to amass $10,000 for a condo down payment by year-end—you do not need to get bogged down in thinking about how inflation will affect your goal amount.

But if your goal is further out in the future, it is worth thinking through and quantifying how your goal amount could increase over your savings horizon. You can use an inflation calculator to determine what a goal will cost in the future.

It is a heavier lift to figure out how much you will need for very long-term goals with multiyear durations, especially retirement. Because there are so many moving parts to determining cash-flow needs for a retirement that could last 25 or 30 years or even longer, it is best to use a comprehensive retirement calculator. The best such calculators take into account your proximity to retirement; your expected years in retirement; other sources of income you will be able to rely on in retirement, such as Social Security; and the complexion of your investment portfolio, among other factors. You will be able to create an estimate of how much money you will need for retirement based on your current income and spending.

Step 3: Back into a savings target that factors in savings duration, goal duration, and return expectations
Armed with a list of your goals and a rough cost for each, you can then back into the amount you should be saving to achieve them. For straightforward, nonretirement savings goals, you can use a basic savings calculator to experiment with the variables to determine how much you will need to save. For example, suppose you have determined that you need an emergency fund that amounts to $24,000. You have already saved $10,000 toward this target and you would like to have the full emergency fund pulled together by this time next year. Assuming a 1% rate of return on your money—what some savings accounts offer today—you will need to save $1,153 a month for the next year to hit your goal amount. You can adjust the variables to arrive at a savings amount and duration that is reasonable for you.

Use a more sophisticated calculator to model out your savings target for retirement; the best such calculators factor in non-portfolio income sources like Social Security, the asset allocation and projected return of your investment portfolio, and the tax treatment of your assets upon withdrawal.

If you have arrived at savings targets for some of your key goals and find that the savings amounts, in total, are unrealistic and/or downright impossible, you can refer back to your goal prioritization (Step 1). Tweaking your budget is also an option. Be cautious before nudging up your expected rate of return to help make the savings load more manageable: Given not-cheap equity valuations and still-low bond yields, which are a good predictor of future bond returns, near-term gains could be muted. Assuming a 4% return for a balanced portfolio is reasonable for the next decade; if you have a much longer time horizon, you can reasonably assume a somewhat higher rate of return.