How Much Should You Save?
Having savings is important throughout our lives. We need to save money if we hope to achieve our financial goals, such as buying a home, purchasing a new vehicle, or taking a break by going on vacation. We also need to prioritize saving for the future, important goals such as retirement or post-secondary education costs for our children. Emergency savings are also vital to solid financial planning: We never know what is going to come at us as we journey through life. Having money set aside to assist us in dealing with unexpected costs (such as car repairs), a job loss or even a health crisis can keep all of us from getting into severe debt trouble.
However, while most of us know saving money is important, many of us are unsure of how much money to put aside each month.
How Much Money Is The Right Amount To Save?
The amount that you should save every month depends on your situation in life. This means you will aim for different amounts depending on your age, your income, where you live, what financial goals you may have, your expenses, and much more. For instance, someone who is 25 years old, earns $30,000 a year, and spends $1500 a month on rent will have a different savings target than a person who is 55, earns $75,000 a year, and has paid off their mortgage and has few overhead expenses.
To be safe, a good rule of thumb is to ideally be saving about 20% of your after-tax income each month, if possible. Of that amount, about half should go towards retirement savings while the other half should be split between saving to reach your financial goals and an emergency fund
Of course, the actual percentages will depend on your current situation. If you already have a lot of reserve money, put aside for emergencies, for example, you can direct less to your emergency fund. If you do not have anything in your emergency fund, you will want to increase your efforts to that goal.
Why Emergency Savings are Important
As mentioned, there are many distinct types of savings. All these types are important, but saving for emergencies is critical since having savings is one way to potentially avoid serious debt issues in the future. If you lose your job, get injured, fall ill, and cannot work, or if an unexpected expense (such as a major car repair or family emergency) comes up, having savings can prevent you from needing to take on new debt to cover those emergency expenses.
Ideally, you should aim to have at least three to six months of expenses in your emergency fund. This amount is rarely doable in real life because it is often extremely difficult to salt away that amount of money.
How to Grow your Savings
When you are faced with the thought of saving six months of expenses in your emergency fund or building a retirement fund of over a million dollars (which is how much money many experts suggest we could need to retire comfortably), the entire process can seem incredibly daunting. These are substantial amounts and thinking about saving this much can be intimidating and (for many people) impossible to do.
However, the way to tackle such a daunting goal is to increase your savings slowly over time. You are not going to save a large amount of money all at once, but you could reach a realistic goal over time if you build your savings up slowly and allow the magic of compound interest (and several decades) to increase your nest egg further.
The first step to salting away some money is to look at your spending behavior. How much do you think you spend each month? Could this amount be reduced? Look where your money is going and see where you might be able to cut some expenses. Tiny amounts add up over time.
For instance, if you can reduce your spending by $20 a week by cooking at home instead of eating at restaurants, that adds up to more than $80 a month. If you save another $10 by switching to a cheaper cell phone plan, $5 by walking to the store instead of driving, and another $5 by cutting out some impulse purchases at the grocery store, you will have at least an additional $100 a month that you can move right into your savings account.
Tracking your spending is an important part of sticking to a budget. It is strongly recommended you use a budget-tracking app (there are many on the Google Play Store for Android devices or the Apple App Store for iPad and iPhone devices). You could also use a spreadsheet, such as Excel or Numbers, or even a small notepad and a pen to record every purchase you make. Any of these solutions will help you see where your money is being allocated.
If you need to eliminate your debt so you can begin to focus on saving money, the professionals at Farber are available to help you. Please click on the FREE CONSULTATION button below or give us a call today. We are here to help you.