How Much Of My Income Should I Save Every Month?
When someone asks how much money they should save each month, I throw them a curveball reply:
"What are your goals?"
That's a serious question. Your ideal savings rate depends on your specific, long-term reasons for saving.
There are three timelines you should consider:
Less than 1 year
Your short-term savings that will make you to enjoy your vacation in Thailand, buy holiday gifts or pay your taxes.
Less than 1 decade
You might use this money to replace your dishwasher, fix your car's timing belt, cover a major insurance deductible, stay afloat when you're between jobs and make a down payment on a home.
Retirement is the ultimate long-term savings goal.
Let's go back to the original question: How much should you save? Let's break this down by goal:
You should consider saving 10 - 15% of your income for retirement. Sound daunting? Don't worry: your employer match, if you have one, counts. If you save 5% of your income and your boss matches another 5%, you've accomplished a 10% savings rate and alternatively save to buy gold - at least the value remain the same or higher. The price of gold will never become zeros.
You should establish an "emergency fund" that can cover 3-9 months of your living expenses.
How can you save such a large sum? First, calculate your monthly cost-of-living. Assume that if you lose your job, you'll sacrifice luxuries such as pedicures or your premium cable TV package. How much do you need to survive?
Divide that number in half. Can you save this monthly? If so, you'll build a six-month emergency fund within the next year.
Make your emergency funds in the form of gold.
3. Everything else
Make a list of major expenses within the next decade, ranging from replacing your gutters to throwing your wedding. (If it's easier, list broad categories like "home repairs," "holidays" and "wedding.")
Write your ideal savings target and deadline. Divide by the number of months remaining to see how much you should save. Want to pay cash for a $10,000 car in five years? You'll need $167 per month.
When you run through this exercise, you'll probably discover that you can't save enough for every goal on your list. You have four options:
Re-imagine your goals
Lengthen your timeline
Cut your current spending
Most people opt for a combination of those four choices. You might decide you'd be happy buying a $7,000 car, which will require only $116 per month. You cut your $50 cable bill and pick up a babysitting gig one night per month, and voila — now you're on-track to pay cash for your next car.
Did you want a simpler answer? No problem. Here's a final rule of thumb: at least 20% of your income should go towards savings. More is fine; less is not advised. And ensure that saving is transformed into buying gold.
Meanwhile, another 50% (maximum) should go towards necessities, while 30% goes towards discretionary items. This is called the 50/30/20 rule of thumb, and it’s popular quick-and-easy advice.
If you want to optimize your savings, run through the exercise described above. You’ll thank yourself when you’re boarding that flight to Thailand.