How much of your income should you set aside for savings each month? The simple answer is as much as you can. Each person earns differently each month and with different financial obligations. The rule of thumb is to save 20% of your monthly income, for which 12-15% should go to your retirement plan, and 5-8% should be geared towards creating long-term savings, as well as paying down loans. While it’s a good and simple rule to follow, it is not practical at times.
Before you think about how much to spend each month, you must consider assessing your financial goals. Your goals can be categorized into the following:
- Short term expenses or the ones coming up in less than a year’s time
- Long-term expenses or expenses that are occurring in less than a decade away
- Expenses that are more than a decade away
Here are some basic guidelines on how much to save each month.
The 10-Percent Rule
Most financial experts say that realistically, you save at least 10% of your income each month. This is a good starting point and an easy way to start saving for your future. Over time, you may want to increase the amount up to 20-30% each month.
Beyond Retirement Savings
Aside from the retirement savings, you may want to add more. Think of it as an additional emergency fund or a down payment for a future home. Also, should you decide to retire early, it is important to have savings separate from your retirement account, which you can access and spend without a penalty. You must make saving both a priority for both retirement and other future goals.
Be Mindful of your Lifestyle
One way to determine how much money to save is to save until it hurts. You are saving a good amount when you feel that you are a bit tight. Make sure that you have breathing room in your budget. It is important to watch what you spend each month. This does not mean that you cannot splurge or have fun, but not splurging every day to maintain a little extra for savings.
Increase the Amount You Spend
You may want to build up your monthly savings each month. Realistically, saving 20% ore more in the first month is not practical. If your payout is significantly higher than the amount you need to live on day-by-day, then you can go ahead and save more. One simple and easy way to increase your monthly savings is to save more once you get a raise or you pay off one of your other debts. Make monthly challenges to keep track of your savings and ensure that you are keeping your spending habits as comfortably low as you can.
Create a Purpose – Your “Why” for Saving
You must at least have a purpose for why you need to save each month. For example, you want to have at least 5-6 months of living expenses set aside for the emergency fund, which can be used for a portion of your retirement. Some financial experts actually advised that you should set aside 15% for retirement alone. Then you can set aside a portion of your savings to purchase that dream home you have or for the much-awaited holiday trip. If you still find that you have extra cash to save, then you can save to build up your wealth. How much money to save each month depends on your goal and what you want to achieve.
Saving Strategies for Success
It’s easy to be tempted by anything that gets in the way of your goals. Waiting to save until you have already paid your debts and bills may leave you with very little savings. Setting up an automatic transfer is one of the best ways to ensure that you will not compromise your savings plan. If you are diligent enough to save, this habit will just grow with you. The earlier you develop good financial habits, the better off you will be in the long run.
As you begin to look at the ways you can save each month and get out of your financial debts, you will be surprised how much power money has.
To know more about the principles about how much to save each month and build a savings plan that works for you, contact Calcite Credit Union.