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More than income or investment returns, your personal saving rate is the biggest factor in building your financial security. But how much money should you save each month? P1000 per month? 50% of your paycheck? Nothing until you’re out of debt or can start earning more money?
How much money should you save each month?
Many sources recommend saving 20% of your income every month.
According to the popular 50/30/20 rule, you should reserve 50% of your budget for essentials like rent and food, 30% for discretionary spending, and at least 20% for savings. (Credit for the 50/30/20 rule goes to Senator Elizabeth Warren, who reportedly used to teach it when she was a bankruptcy professor.)
We agree with the recommendation to save 20% of your monthly income. But it’s not always that simple to suggest the right percentage of income for YOU to save.
If, for example, you’re a high earner, you’d be wise to keep your expenses low and save a much larger percentage of your income.
On the other hand, if saving 20% of your income seems implausible, or even impossible at the moment, we don’t want you to get frustrated. Saving something is better than nothing.
But if you want a shot at being secure through old age—and having some extra cash for things you want—the numbers suggest that 20% is the number you’ll want to reach or exceed.
Where should you save?
Opening an online savings account is a great way to start saving. You’ll find some of the best rates online and accessing your funds can be done from anywhere in the world.
Some of the best online banks in the Philippines that offers high interest rates are Tonik Bank and Diskartech. If you want to know more about online banks that offers high interest rates for savings account, please click here.
What are you saving for?
True financial independence means that you can sustain your chosen lifestyle entirely from your investments’ interest and dividends.
How much money do you need to save to do that?
Good question! The simple answer: It all depends. It depends on whether you’re willing to live at the poverty line, need two homes and a sailboat, or fall somewhere in between. It also depends on how well your investments perform. If you can earn an average annual return of 7% on your money, you can stop working with a lot less than if you only earn 3%.
For simplicity’s sake, we’ll use the common “4% rule”, which states that, theoretically, you could withdraw 4% of your principal balance every year and live on this indefinitely. That means that you’ll need to save 25 times your annual expenses to become financially independent. (If the math doesn’t shake out for you, remember 25 x 4 is 100, and 100% = your total balance.)
There are problems with the 4% rule, of course. For one, there are no risk-free investments that yield anywhere close to 4% today. Sudden inflation could also become a problem. To account for this, and for simplicity’s sake, we’ll base how much you need to save based on your gross (before tax) income not your expenses.
In our example, we assume that you want to save 25 times your annual income, rather than your annual expenses. By default, you’ll actually be saving more than you need (because once you’re financially independent you could stop saving). But when discussing your source of income for the rest of your life, it’s best to be conservative.
How long will it take?
The chart below shows how long it will take you to amass 25 times your income based upon the percentage of your income you save. (We assume a 5% average annual return to account for a more aggressive asset allocation while you’re saving.)
|% of Income Saved||Time Required To Save 25x Annual Income|
As you can see, by saving 20% of your income you’ll hit 25 times your annual income in just over 40 years.
That means a 30-year-old who starts saving today (assuming no prior savings) will hit this target by 71. If you save less than 20%, it will simply take too long for your money to grow to a point where it will allow you to live off just interest.
It’s not that scary, we promise!
Remember that you only need 25 times your annual expenses, not your income, to become financially independent. The lower you keep your expenses, the sooner you’ll achieve your personal savings goal. Also, our savings chart doesn’t take taxes into account.
What if you can’t save that much?
Don’t stress. Saving something is better than nothing.
I can already hear the shouts from the comments: “How ridiculous! I spend almost everything I earn, and on rent, food, and transport! This website is out of touch with its audience!”
Okay, okay. If the 20% scenario I just sketched out doesn’t fit your situation (which is going to be unique to you), then please don’t think that I’m saying you’re a failure or a chump. Like I said, we believe everyone should aim for 20%, not that everyone should hit that target on their first try.
Start small. Start with 1%. When that doesn’t sting so bad, go up to two, or even three. Maybe you hit 5%, and that feels pretty good. Maybe you take a crazy leap for 10%, and that leaves you stressed and strapped, so you scale back. It’s a process, a literal give and take.
Through it all, keep that 20% goal in mind. It’ll keep you from getting complacent. Whenever you get a raise, raise your saving rate! You were doing fine without that money before, and you shouldn’t miss it if you never get used to having it.
Finally, if you’re in debt, you might already be saving more than you think. That’s because paying down debt is essentially saving in reverse.
Think of it this way: One day, you’re debt-free. But you’ve been making big monthly payments to your debts for years. If you suddenly begin to save that money, what would your saving rate be?
Also, try investing
If you can’t save a good chunk of your paycheck every month, investing once (for right now) can help you start saving over the long run.
One investment platform option is Gotrade.
With Gotrade, you can easily invest in US stocks with just U$1. Yes, it’s simply $1! You don’t need thousands of dollars to invest.
For you to get a better understanding of all that Gotrade has to offer, here’s our full review.
I hit 20%—what’s next?
Keep going! As long as you’re not depriving yourself today, it’s difficult to save “too much”.
Take the same advice we gave to those who are struggling to hit 20%: Test your limits, and try to increase them. Building up strength (either physical or financial) takes discipline and consistency, as well as a willingness to listen to your body (or your bank account) when it tells you your current regimen is just too intense.
But saving more is definitely a good idea. Retirement experts say that the traditional recommendation of 15% of income is honestly too low to guarantee a comfortable retirement, and that 25 or 30% is a safer bet.
Also, keep in mind that if your goal is to retire early or someday leave a well-paying but high-stress job, your savings rate will likely need to be 50% or more. This may seem impossible, but it might give you pause when making major financial decisions like deciding how much house you can afford or what kind of car to buy.
The most important thing is to start saving. How much money should you save each month will vary from person to person, as well as from year to year. The best savings philosophy, in keeping with our sports metaphors, comes from Nike: Just do it.