The Right Percentage of Income to Save Each Month
How much money should you save every month? There are many ways to answer this question. The short answer is that you should save a minimum of 20% of your income. At least 12% to 15% of that should go towards your retirement accounts (Pensions, etc). The other 5% to 8% of that should go toward a combination of building an emergency fund, creating other long-term savings, and paying off debt (credit cards, etc). While that’s a good rule of thumb to follow, it’s not the only answer. If you want a more in-depth answer, read on.
Your Financial Targets/Goals
To take a deep dive into figuring out how much you should save each month, start by looking at your goals. Roughly speaking, your financial goals will break down into three buckets:
- Expenses that are coming up within less than a year (targets)
- Expenses that are coming up within less than a decade (targets, again)
- Very long-term expenses which are a decade or more away (goals)
Short-Term Financial Targets
Expenses coming up in less than one year are things like taking a holiday, buying gifts, making sure you have enough money on hand to pay your taxes, and maintaining savings for a birthday celebration.
Another example of a short-term financial target is saving up three months’ worth of expenses in an emergency fund (up to six). You could do this in less than a year. If you want to save $5,000 in nine months, you’d need to put $555 per month toward this goal.
Long-Term Financial Targets
Under the less than a decade category, include expenses like replacing your appliances, making major home repairs, purchasing a new car (ideally by paying cash for it), or making a deposit payment on a house.
Extremely Long-Term Financial Goals
Under the longer than a decade umbrella, your goals might include building a sizable college savings fund for your Children or purchasing a second home. Of course, you should also include the ultimate long-term savings goal: retirement.
Create A List, Plan, And Calculate
I have already covered the topic of retirement many times already in others posts, so you can leave that out of the picture for now. In the list of expenses you’re currently saving for, include everything else, such as weddings, home repairs, holidays, travel, and college savings. Now write down your ideal savings target and the deadline. Do this for every single goal on your list. Then divide that time frame by the amount of money you need for each goal.
For example, let’s say you want to build $10,000 in savings for a wedding, and you plan on getting married within the next two years (or you have a daughter you need to pay for, traditionally). You’ll need to set aside $416 per month over the span of the next 24 months to reach your $10,000 target.
Run this calculation with every goal on your list. By the time you’re done, you’ll probably realise you can’t fund everything. The first time I tried this exercise, my savings goals ended up being larger than my income!
What To Do When Your Savings Goals Exceed Your Income
What can you do when this happens? First, modify or cut a few of your goals. Can you purchase a cheaper car? Throw a less expensive wedding? Buy a less expensive house, which will require a smaller deposit?
Next, look at ways you can cut your current spending. Cancelling subscription TV can allow you to save about an extra $50 per month, which you can put toward one of your many savings goals. Then see if you can extend the timeline for any of your goals.
Do you need to replace your kitchen appliances this year, or can you live with your current car for a few more years? Finally, look at ways you can earn more money, such as through freelancing on the side. In summary, there are two ways to answer the question, “How much should I be saving, and how much more can I earn now?”
If you’d like a specific custom-tailored answer to this question, you’ll need to spend at least 30 minutes writing out your targets/goals and anticipating big purchases. If you want a quick rule of thumb answer, then make sure you’re saving at least 20% of your income. Simples!
Make your lists today – go on, you know you want to really!
00971 50 8769035