“You should be saving as much as you can every month.”
How often do you hear this? People throw this statement around pretty regularly. This is a nice maxim but many people need to come up with an actual number.
Should I be saving $500 a month? Or maybe $1,000? What is my personal savings goal?
When coming up with a strategy, multiple factors should go into just determining your savings amount. Age, lifestyle, monetary obligations—these are all important considerations when coming up with your monthly savings goal.
So, here are some ways to make an easy-to-follow savings goal! And just some ways to look at your finances with a keener eye.
The generic 50/30/20 rule
There is a popular 50/30/20 Rule endorsed by many people including financial advisors. Any such rule is naturally generic. Let’s discuss it and elaborate on how it may or may not work for you.
Here is a breakdown of the rule:
- This rule states that 50% of your income should be kept aside for essential expenses. This should cover everything from your mortgage or rent to utilities, groceries, conveyance, and other essentials
- Next, 30% of your income should be allotted for discretionary spending. This includes dining out, buying nonessential goods or products, paying for services that you do not need for work or survival.
- Finally, 20% of your income should be saved.
This generic rule may or may not work for you. There are millions of people who would not be able to manage all their essential expenses with just 50% of their income. Of course, there are plenty of people who can live comfortably with all essentials by spending less than 50% of their monthly income.
The problem lies in the proportional assessment, as it depends entirely on the quantity of income and financial obligations of a person.
The importance of budgeting
It is practically impossible to discuss savings without factoring in the monthly budget. Talking about the amount of savings is premature and a nonstarter before the budget is set aside. A monthly budget comprises all essential expenditures, some discretionary spending, and a reasonable sum of cash for emergency expenses.
Keep in mind: you can only estimate an amount of potential saving only after you have a fairly accurate budget, which could fluctuate slightly from one month to another depending on circumstances.
After you have put together an accurate budget, then you can start to figure out what money is leftover. It is wise not to leave your account at zero, so keep a comfortable margin for emergencies in your account or even set that money aside in an emergency fund.
Save First, Spend on Discretionary Items Second
One of the most common mistakes committed by millions of people, especially those who are young, is to save some money after spending on everything they desire. The right approach is to save first and to spend on discretionary purchases with what remains.
For example, if your monthly income is $5,000 and after necessary bills, you have $1,800 remaining. We recommend putting $1,200 into your savings. This leaves you an adequate cushion. Now, if you are not a person who likes to go out to eat and wine and dine, well, you can push this a little further.
Do not wait for the month to end and see if your savings goal will be waiting in your account. Most likely, it will be gone.
Increase your savings without adversely affecting your life
A young adult may be able to save only 2% to 5% of their monthly income. Young people usually have student loans to repay and lower salaries. But, as you progress through your twenties and thirties, you should be able to ramp that number up to 10%. If this is you, just make sure you raise that number incrementally—don’t throw your budget out of whack by being too eager.
Something to remember: your savings should increase over time, and it should be done without any adverse effects on life, most notably health, diet, education, and other important aspects.
One of the common mistakes people make is the failure to review their savings strategy. Expenses will shoot up as a family grows, due to new avenues of spending (diapers, college savings), and more financial obligations. This is normal. But, if you are wise, you will always be checking and adjusting your savings goal.
Saving and investing are the mantras for financial security and independence
Billionaires and millionaires have financial security. Those who earn a hefty paycheck do not have to worry about financial independence, as much as those who are closer to the median income. For ordinary people, the two mantras for financial security and independence are saving and investing.
As you earn, saving should be a habit, not an option. Likewise, your savings should be wisely invested so they can generate a return. Investing does not necessarily mean one has to be savvy about stock markets, real estate, or foreign exchange rates. One can safely invest in many kinds of reliable investing products like a 401(k) or even mutual funds. See more here:
Here are some other avenues to explore:
- Precious metals Throughout history, the price of precious metals such as gold and silver have gone up. Except for a rare dip or slowdown, precious metal prices have risen exponentially in various eras.
- Art If you are a person who likes fine art and has an eye for the next big artist or trend, you can make a decent return by buying and storing art. Paintings and sculptures from famous artists rarely lose value.
- ETFs Similar to a mutual fund, an ETF is a balanced and targeted way to invest in high-quality companies in the stock market.
In short, your savings should be invested to attain financial security and independence. Find something that interests you or reach out to a financial advisor for help, if you just don’t know what to do with your savings.