The question of how much money you should save is a very frequent topic among financial professionals. The standard answer is to use the budget 50/30/20. This says that 50% of your income should be used for necessities like rent, food, and transport. The next rung of 30% should be used for discretionary spending or “fun money.” The remaining 20% of your income should be used for financial priorities. The 50/30/20 rule is a good guide to use, but much of that 20% in financial priorities goes towards paying down expensive debt.
The real answer for how much you should save is, as much as you are able. If you are strapped for money at the end of each month after rent and other bills, save 1% of your income. If you are a high earner and can put away 30% of your income, do it! The goal is to save as much as you can. Whether this savings goes to an emergency fund, retirement account, or other savings is a topic for another time.
The first step in figuring out how much you can save is to track your spending. If you spend $5 per day on coffee from Starbucks, you can brew from home for a fraction of the cost and save a lot of money. If you go for coffee every week day, that adds up to $25 per week and $1300 each year in coffee! That money looks much better sitting in a retirement or savings account.
After you have cut your discretionary spending to a minimum or at least in half, you can put that amount toward savings. A few months go by and you’ll realize saving this money doesn’t seem that bad anymore, so you may decide to stretch your savings to a few more dollars each month.
Once you have established a routine of savings, push yourself to save a little more. Don’t let yourself become too comfortable with your current savings rate.
I have to mention though, if you are younger and have decades of employment ahead of you, you are able to save less, but if you are a few years off from retirement, you will desperately need to save as much money as you can.
Saving money is very important, and being successful with saving is a challenge. If you trim your spending and give your savings priority over your spending, you will be amazed at how fast those dollars saved will add up. Next week I will discuss emergency savings and retirement savings.
Everyone has a different financial situation. The amount you save/spend will depend on each individual situation. Consult a financial professional for individual guidance.