ESTIMATE MONTHLY SAVINGS CONTRIBUTIONS

Savings calculator

See how much you need to save every month to reach your savings goal. Enter your goal amount and how much cash you’ve already saved toward the goal. Then, decide when you need to reach your goal and how much interest (Annual percentage yield, APY) you expect to earn on your cash while saving. This Savings calculator can help you budget and plan ahead.

How to use this calculator

For illustrative purposes only. Calculations assume your chosen APY will not change over time and contributions are made on the first of the month.

How much do you need to save every month to reach your goal?

Monthly contribution

$383.09

Your savings calculator questions, answered.

How much should you save? Where should you save it? How much tax do you pay on interest earned? Here’s what you need to know.

What is Annual Percentage Yield (APY)?

Annual Percentage Yield (APY) is a standardized measure used to express the effective annual rate of return on an investment or savings account, taking into account the effect of compound interest. It's an important concept in finance and banking that helps consumers compare different financial products more accurately.

Here are some key points about APY:

Definition

Annual Percentage Yield (APY) represents the total amount of interest earned on an account over one year, assuming the interest is compounded and left in the account. APY factors in the frequency of compounding (daily, monthly, quarterly, etc.), which can significantly impact the total return.

Difference from APR

Annual Percentage Rate (APR) does not account for compounding, while APY (Annual Percentage Yield) does. As a result, APY will always be equal to or higher than APR for the same stated interest rate.

Formula

The basic formula for APY is:

APY = (1 + r/n)^n - 1

Where:

r is the stated annual interest rate

n is the number of compounding periods per year

Regulatory requirement

In the United States, banks are required by the Truth in Savings Act to disclose the APY for savings accounts, allowing consumers to make more informed decisions.

Comparison tool

APY allows for easier comparison between different accounts or investments, even if they compound at different frequencies.

Impact of compounding frequency

Generally, more frequent compounding leads to a higher APY, given the same stated interest rate. Understanding APY is crucial for consumers when evaluating savings accounts, certificates of deposit (CDs), and other interest-bearing financial products. It provides a more accurate picture of the potential returns and allows for better-informed financial decisions.

How is APY determined?

APY (Annual Percentage Yield) is determined by several factors and calculations. Here's an explanation of how APY is typically determined:

Interest rate

The basic interest rate is the starting point for calculating APY.

Compounding frequency

This is how often the interest is calculated and added to the principal. Common compounding periods include daily, monthly, quarterly, or annually.

Time period

APY is typically calculated for a one-year period.

Formula

The basic formula for APY is:

APY = (1 + r/n)^n - 1

Where:

r is the stated annual interest rate

n is the number of compounding periods per year

Here's a breakdown of how APY is determined

Start with the nominal interest rate.

Consider how often the interest compounds.

Apply the formula to calculate the effect of compounding over a year.

Express the result as a percentage.

For example, if you have an account with a 5.00% interest rate that compounds monthly:

r = 0.05 (5.00% expressed as a decimal)

n = 12 (compounding monthly, so 12 times per year)

APY = (1 + 0.05/12)^12 - 1

= (1.004167)^12 - 1

= 1.0511 - 1

= 0.0511

APY = 5.11%

In this case, the APY (5.11%) is higher than the nominal interest rate (5.00%) due to the effect of monthly compounding.

Factors that can influence APY include

• Market conditions

• Federal Reserve policies

• Competition among financial institutions

• Type of financial product (e.g., savings account, CD, bond)

• Term length for certain products

It's important to note that APY is used for comparing different savings products, while APR (Annual Percentage Rate) is typically used for comparing loan products.

How is interest calculated?

Interest calculation methods can vary by financial product and the terms set by the institution offering it. Compound interest is a financial concept where interest is calculated not only on the initial principal amount but also on the accumulated interest from previous periods. In other words, it's "interest on interest." Here’s how M1 calculates compound interest in this calculator;

Two-step formula

First, you calculate the total amount of money you’ll have once you’re done saving, which includes interest:

A = P(1 + r/n)^(nt)

Where:

A = Final amount

P = Principal

r = Annual interest rate (as a decimal)

n = Number of times interest is compounded per year

t = Number of years

Second, you subtract the principal from the final amount to determine how much interest you have.

The interest would be: A - P

How much should you have in your emergency fund?

The amount of money you should have in your emergency fund depends on your personal financial situation and comfort level, but there are some general guidelines that financial experts often recommend. Here's a breakdown:

Basic recommendation

Most financial advisors suggest having 3 to 6 months' worth of living expenses saved in your emergency fund.

Factors to consider

• Job security

• Income stability (e.g., freelance vs. salaried)

• Number of income earners in your household

• Health and insurance coverage

• Debt obligations

• Overall financial goals

Calculating your emergency fund

Monthly Living Expenses × (3 to 6) = Emergency fund target

Include essential expenses like

• Rent/mortgage

• Utilities

• Food

• Transportation

• Insurance premiums

• Minimum debt payments

Adjustments based on circumstances

• Single income household: Aim for 6 months or more

• Dual income household: 3-4 months might be sufficient

• Freelance/variable income: Consider saving up to 12 months' expenses

• Stable job with good benefits: 3 months might be adequate

Starting small

If saving 3-6 months' worth of expenses seems overwhelming, start with a smaller goal like $1,000 or one month's expenses, then build from there.

Where to keep it

Emergency funds should be easily accessible. Consider high-yield savings accounts or money market accounts that offer some interest while maintaining liquidity.

Remember, an emergency fund is meant to cover unexpected expenses or loss of income. It's not for planned expenses or investments. The goal is to have enough to give you peace of mind and financial stability in case of unforeseen circumstances.

Ultimately, the right amount for your emergency fund is what helps you sleep well at night, knowing you're prepared for financial surprises.

Which type of account has the best return?

The accounts that typically provide the best Annual Percentage Yield (APY) can vary over time based on market conditions and financial institution policies. However, certain types of accounts generally offer higher APYs than others. At the top of the list of accounts that often provide competitive APYs is;

High-Yield Accounts

• Often offered by online banks

• Generally provide higher APYs than traditional savings or checking accounts

• Easily accessible and FDIC insured

Working toward your savings goals

Image from below looking up at office buildings signifying growth for High-Yield accounts.

High-yield account 101

A high-yield savings account is an account where consumers can earn a competitive interest rate, compared to the national average savings account interest rate.

Image of hand on a tablet reviewing numbers of a financial plan.

What’s a financial plan?

Financial plans help create realistic goals and outline steps to reach them. If you make a plan, you’ll be less likely to make poor financial decisions. So what should you include in a financial plan?

Image of a new sprout growing out of coins signifying the security of an emergency fund.

Build an emergency fund

Emergency funds hold cash set aside to cover unexpected or catastrophic events, like job loss, home damage, or medical bills. Here’s how you can figure out how much to save.

Join M1 to earn interest on uninvested cash.

Open an M1 Individual High-Yield Cash Account¹ to earn interest while working toward your financial goals. Maybe you’re creating an emergency fund, building financial security, or planning a dream vacation.

You can also share an M1 Joint High-Yield Cash Account¹ with someone to pursue financial goals as a team.

Earn, spend, invest, and borrow with M1.

¹ M1 High-Yield Cash Account(s) is an investment product offered by M1 Finance, LLC, an SEC registered broker-dealer, Member FINRA / SIPC. M1 is not a bank and M1 High-Yield Cash Accounts are not a checking or savings account. The purpose of this account is to invest in securities, and an open M1 Investment account is required to participate in the M1 High-Yield Cash Account. All investing involves risk, including the risk of losing the money you invest.

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