How much should I be saving? Rule of thumb.
The 50/20/30 rule
There are many concepts that have been developed in an attempt to assist people with saving. One of these is a rule known as the 50/20/30 rule. In her book “All Your Worth: The Ultimate Lifetime Money Plan”, US Senator Elizabeth Warren popularized the rule.
Divide your after-tax income; spending 50% on necessities, 30% on wants/discretionary items and 20% should go towards savings.
How you can start:
Understand what your needs are versus what your wants are then prioritise your needs.
1. Determine what you are saving for; retirement, education, emergency fund, debt repayment etc. This will give you an idea of how much to save each month.
2. Adopt the envelope method where you spend what you allocated.
For example, if you allocate P500 to groceries then put P500 in an envelope and only take that with you to the store to ensure that you will not spend more than that P500. Additionally, you can take it a step further by reshuffling allocated money; if you got a saving on one expense just use the balance to cover a different one so that you are still spending your budgeted money and not a thebe more.
3. Remember what Warren Buffet said, “Don’t save what you have after spending, spend what you have after saving.”
4. Consider using a budgeting app to help keep track of your finances!
5. Stick to your budget: even if you start making more money, stick to your budget! Spending more money as you make more money is detrimental to your financial health.
Lastly, start small with your saving so that you ease yourself into it.
For example, saving P20 each day might not seem like much but at the end of the month you have P600 which can go into a unit trust. Eventually saving 20% of your salary will not be so hard. Be patient with yourself, it’s a lifestyle not a trend BUT start saving today because tomorrow is too late.
Get a Financial Adviser today to have as a sounding board for all your financial needs with your financial journey.