There is no need to argue that having a solid savings account is an important part of financial security. The beginning of the year is a great time to establish and follow new saving habits. The question is, how much money should you save?
We have asked financial experts to share their advice on saving and budgeting – and here is what we found.
How Much Do I Need?
Before you ask yourself how much you should save, think about what it is that you are saving for. You definitely have purchases and services that you want to be able to afford or trips that you’d like to go on. There are also bigger goals: saving for the major life events, emergencies and retirement.
Spend some time identifying and specifying your saving priorities and goals before you start putting money aside – otherwise, it will be more difficult to justify the saving habit.
Developing healthy saving habits is key to financial stability.
Start with 10% of your income
Most experts recommend starting to save at least 10 percent of your income. This is considered to be a great starting place for most income earners who want to form a healthy saving habit. Eventually, the goal is to gradually increase the savings amount to fifteen, twenty and even thirty percent of income.
A common budgeting suggestion is the 50/20/30 rule, under which:
- 50 percent of your income is allocated towards essential expenses, such as housing and food
- 20 percent of your income is used towards major financial goals, such as savings and debt payments
- 30 percent of your income is spent on flexible expenses, such as shopping and eating out
This budgeting technique requires you to look at your income and make arrangements for your spending and saving habits. The percentages don’t have to be exact: the goal is to be consistent every month with the way you choose to allocate your expenses to each category.
Find what works best for your income
Of course, these budgeting suggestion are not universal. For instance, higher-income earners can have an easier time saving 20 percent of their income, while lower-income earners may struggle to put 10 percent towards their retirement and savings account, especially when they also have debt. The living expenses can also differ in different countries and cities, which should be taken into consideration when determining the monthly budget.
Generally speaking, the more money you make, the more you should be saving. But regardless of how much you earn, you should prioritize some form of saving. Begin by developing a saving habit that works best for your budget, and then gradually work your way up to reach your saving goals.
Where Should I Start?
Change the mindset
If you feel uneasy or pressured when you hear the words “saving” or “budgeting”, then it’s time to change your mindset. Budgeting shouldn’t be looked at as a constraint on spending or activities, but as a way to organize, review and be in control of your spending.
“I always talk about maximising value from your cash flow, and never about budgeting,” Ian Whiting, CFP.
We all know that if you don’t tell your money where to go, you will wonder where it went. Knowing where you spend your income can help you make the necessary adjustments and prevent you from overspending. It can also help you see how much money you can potentially save after the essentials are taken care of.
Healthy saving habits are best established when you have a solid budgeting plan. Check out our infographic to get more budgeting tips.
Know what you are saving for
As we already mentioned, it is always easier to save when you have an end goal for your savings. Ask yourself: what are your short-term and long-term goals? Your short-term goals can include extra purchases (a new laptop or gifts during the holiday season) and vacations plans. Long-term goals are what will help you achieve financial stability. Think about upcoming major expenses (home purchase or repairs, wedding planning) and start looking into different retirement plans – your future self will only thank you.
It is always a good idea to keep an emergency savings fund. Accidents do happen, and having an emergency savings account can save you a lot of unnecessary stress. Use this account in a case of a serious financial event (car breaking down, sudden health problems or losing your job). Experts recommend having anywhere from three to nine months’ worth of your living expenses in your emergency fund.
Remember: the key is to start
One of the biggest financial regrets people have is starting their saving habit too late. If you start saving in your 20s, you will have an easier time in your thirties and forties and will be further along in your retirement planning.
What if I Have Debt?
If you have a significant amount of debt (student loans, credit card debt, etc.), then the best solution is to focus on the negative balance first. Prioritizing debt first has several benefits. First, while having money in the savings account may be comforting, it only gives a false sense of security when you are still in debt. Second, most debts have a higher interest rate than savings accounts do, so paying off the debt earlier can actually save you more money in the long run.
At the same time, you don’t have to completely forget about saving. Depending on your situation, you may want to allocate a certain percentage of your income towards the emergency savings account to make sure that you have some funds in case of any unexpected occurrences.
Prioritize paying off high-interest debt and putting funds towards your emergency savings account first.
Since every individual’s situation is unique, you can speak to a financial adviser to help you with your saving and budgeting plans and to start planning towards the next step: building your wealth.