Saving is an important aspect of personal finance. By saving, you can achieve your long term financial goals and obtain the more expensive things in life that you have always wanted. Since saving is so crucial, the question now becomes, “how much of my income should I save?” The answer to this question is not clear cut as it depends on the consumer’s unique goals and needs. To understand more about saving and what methods you can use to save, continue reading below.
What does the average Canadian budget look like? Find out here.
What Should I Save For?
Money is a very valuable resource that can help you in many aspects of life, whether it is an emergency or a planned event. Everyone has different goals for their life, part of achieving those goals is making a financial plan and saving accordingly. Below are several items you should think about saving for. Remember, everyone’s goals in life are unique, some of the below items may apply to you, while others may not.
- Retirement. It is highly unlikely that you want to work for your entire life! Saving for retirement will ensure that you have funds to stop working later in life.
- Down Payment. If you want to purchase a house, condo or other property, you will probably need to put down money. Down payments are not cheap, saving up for one is usually necessary.
- Emergency Fund. Life happens, money within an emergency fund can go a long way. Emergencies are hard to predict, it’s always good to put a bit of money aside to help you out when the worst occurs.
- Travel. One of the most enlightening experiences in life is traveling to different parts of the world. The only downside is the price. Setting aside money to travel is a common habit for many who want to visit different parts of the globe.
- Luxury Items. Whether it’s a fancy car, expensive clothes, or pricey furniture, luxury goods can make you feel accomplished and lavish. You work hard for your money, sometimes it’s worth it to treat yourself!
- Education. Unfortunately, education is not cheap these days given the high demand. However, education can help you get a new job to make more money or explore a passion you have. Setting aside money for tuition and other school expenses can help you achieve your academic goals.
- Debt Repayment. Saving money to pay off outstanding debt is a reason to save too. Repaying debt is often an investment, particularly if there is an asset attached to the debt.
What Methods Can I Use to Save?
If you’ve decided to start saving money, the next step is to find a method that works for you to start and continue to save. As most know, saving is easier said than done. It takes some self-control which can be challenging, especially when you start. Below are some methods and tips for saving money.
Old Fashioned Budget
Budgeting is the oldest saving trick in the book, mainly because it actually works. Your first step is to write out all your income and expenses. Once you do that, you can determine how much net income you have (income minus expenses). From your net income, you can determine a realistic savings amount as another “expense”.
Another thing budgeting helps with is controlling expenses. Maybe when you’re budgeting, you’ll find out that you spend too much on lunches at work or outings as an example. Understanding what and how much you spend is valuable for financial reflection and implementing positive spending changes. If you can cut down your expenses, you can contribute more to savings.
50/20/30 Budget Rule
The 50/20/30 budget involves allocating 50% of your after-tax income to needs, 30% on wants and 20% to savings. This budget rule comes from Senator Elizabeth Warren’s book, All Your Worth: The Ultimate Lifetime Money Plan. This tactic has received a lot of positive feedback from those trying to save.
Needs refer to anything that is a necessity of life. For example, rent payments, mortgage payments, groceries, insurance, utilities, and car payments are all needs. Wants are essentially the opposite of needs. Outings, tickets to events, fancy clothing, and flashy electronics are a wants, to name a few, but the list is endless. Anything that you spend money on that isn’t absolutely essential for life is considered a want. Lastly, savings is merely money set aside for the future.
Set Saving Goals
How much do you actually want to save? If you can come up with an actual dollar amount to save, working toward that amount becomes easier. Every time you contribute to the savings balance you can feel a little sense of accomplishment because you’re closer to your goal.
How to save when you have too much debt? Click here to find out.
How Does Debt Affect Saving?
Debt payments are regular expenses that prevent you from saving money. However, that doesn’t mean that you should work on paying off your debt and never using debt again. Debt can actually help you save money. For example, if you have monthly mortgage payments, you are technically putting money into savings because a home is an investment. On the other hand, some debt payments, such as car payments, aren’t really an investment but rather an expense. Some people need a car, or other similar forms of debt, to work and live which is perfectly okay. It is important to understand that this type of debt is an expense, not an investment, which doesn’t count as savings.
Saving is important for many reasons and can help you in many aspects of life. Every consumer is unique in their financial goals which means their saving goals will be unique too. Before you start to save, take the time to consider what your long term goals are and what you want to use your savings for. Creating a savings plan will help you stay on track and keep motivation high.
Finally, to answer how much of your income you should save, it depends on the consumer. How much you save must match your savings goal. Some consumers will need to save more than others, it all depends on what you want to achieve through your savings.