When someone asks how much must I save monthly from my income, I reply: “What are your plans?”
That is an important question. Your best savings amount depends on your chosen, medium to long-term ideal savings rate, and your long-term understanding for saving.
There are 3 major periods you should take note of:
Less than 1 year
See if your short-term savings can take you on a vacation, buy gifts for holiday or settle your taxes.
Less than 10 years
You might use this money to buy a new washing machine, fix your car, settle an important insurance deductible, stay afloat when you are moving to another job and make a part payment on a home.
Retirement is the most important justification for long-term savings goal.
Let’s go back to the original question: How much must I save monthly from my income?
Let’s go into details:
10 – 15% of your income should be considered for saving for retirement. If you are working under somebody, that counts. If your employer saves 5% of your income and you save another 5%, you have reached 10% savings target. Which is cool.
You should have an “emergency fund” in place that that can cover 3-6 months of your living expenses.
How can you save such a huge sum? First, work out your cost of living for each month. Lets take it, if you lose your job, you will do away with expenses you can live at the moment without-luxuries such as manicures or TV package.
Can you survive on how much? Have this divided in two. Can you save this amount monthly? If so, you will be able to save a six-month emergency fund within the next year.
3. Anything else
Make a list of primary expenses within the next 10 years, from replacing your cabinets to having your wedding. (If you want it in a simple form, list broad categories like “wedding,” “holidays” and “car repairs.”)
Write your savings target and time to have it. Divide this by the number of months remaining to know how much you should save. Example if you want to pay cash for a car that costs 7,000 car in three years? You will need to save 195 each month.
When you go through this activity, you will likely find out that you cannot save enough for every goal.
You have four options:
- Go over your plans again
- Increase the time it will take to achieve them
- Reduce your current expenses
- Earn more
Did you want an easy answer to “How much must I save monthly from my income? No problem. See the final suggestion: 20% of your income must at least go into savings. More is great; less than 20% is not advised.