Your personal savings rate is the biggest factor in building financial security. Even more so than income or investment returns. But how much should you save? $50 per month? 50% of your paycheck? Nothing until you’re out of debt or can start earning more money?
Most experts would tell you that you should be saving 20% of your income every month. According to the 50/30/20 rule, you should set aside 50% of your budget for essentials like rent and food, 30% for discretionary spending (shopping, entertainment, lattes, etc.), and at least 20% for savings. But everyone has a different financial situation. Some people can't afford to save 20% and still be able to pay their essential bills. Others have the fortune of being able to contribute more than 20% and still live comfortably.How much should you save every month?
If you’re a high-income earner, you’d be wise to keep your expenses low and maximize the percentage of your income that you save each month. If an unexpected expense comes up, you'll have money to pay for it because you saved!
If you are not a high-income earner, and if saving 20% of your income seems implausible, or even impossible at the moment, don't worry. Saving 20% is just a suggestion. Ideally, we would save 100% if we could. So even if you can save 20% just remember that saving something is better than nothing.
However, don't use this as an excuse to not save at all. If you want a shot at being secure through old age and having some extra cash for things you want, then I suggest that 20% is the number you’ll want to reach or exceed.
Why 20%?
Assuming you’re in your 20s or 30s and can earn an average investment return of 5% a year, you’ll need to save about 20% of your income to have a shot at achieving financial independence before you’re too old to enjoy it.
But if you want to grind every day until you die, maybe you don’t need to save all that much. Hopefully, you’ll still want to save for an occasional vacation and something in an emergency fund in case your car dies or you find yourself between jobs.
Aside from that though, we save so that one day we no longer have to work for the money. For most of us, that day won’t come for many decades, but there are regular working people who reach it as young as 40 or even 35. So just remember that the sooner you start, the sooner you can finish. Starting today is better than starting tomorrow.
