Saving – how much is enough?
We are often asked the question, how much money should I be saving? There is no perfect answer. Well there probably is. Save as much as you possibly can. Right? Easier said than done. Taking a step back, are we talking on a weekly basis, monthly or even an annual target to strive for? Another perspective and one to be recommended is to determine a savings figure based upon a percentage of your earnings. The positive of this tactic means a savings target can be tailored to the individual as opposed to comparing yourself to others and keeping up with the joneses per se.
Whatever approach to saving you take and go by, the easiest rule of them all and an easy one to remember is ‘a dollar saved is better than none at all’. Think of it like going to the gym – a workout, good or bad, will have you feeling better about yourself than none at all. Or better yet think of it like a day of golf – even a bad round of golf is better than a day at work right? Let’s, digress and get back to the task at hand.
Have you heard of the 50/30/20 budget rule? It’s all over the World Wide Web! Not a bad rule of thumb to use for your budget blueprint. Let’s gloss over it.
What is it and who’s it for?
The simple and easy budget method works to organise your money in the following manner;
- 50% of income to essentials. In other words, living expenses (mortgage/rent, groceries, transport, utilities and any other bills.)
- 30% of income to personal spending. (entertainment, shopping, dining etc)
- 20% of income to personal savings and debt payments.
Simple enough, right? It’s a solid option for those new to budgeting. As an old colleague used to say keep it simple stupid, we aren’t re-inventing the wheel here! There are that many complex budgeting methods out there that over-complicate what is, and should be a simple enough task of organising and controlling the direction of your personal finance.
Like any budget, this approach is flexible – the 50-30-20 rule applies but you can amend the numbers to fit your lifestyle. Another positive of this method is the non-restrictive nature of the 50-30-20 guideline allows for discretionary spending. Meaning you can still budget for fun and activities, and lead a comfortable life while chipping away at debt and fostering solid, healthy saving habits.
Who the 50-30-20 rule is not suited for?
If you have a high level of income, 30% toward personal spending may lead you astray and thinking that just because you have a 30% threshold to freely spend will result in you frivolously spending your disposable income on unnecessary, unneeded items. Put in simple terms, the 30% personal spending allocation does little, to nothing to lessen the effects of bad spending habits and
If a 20% of your income, savings target appears insurmountable and a mark beyond immediate reach, don’t beat yourself up. Just think, a dollar saved is better than none at all.
Another drawback of the 20% personal savings/debt payment guideline is that this does little to those people looking to reduce debt quicker, or even those who have debt that exceeds 20% of income. The solution would be to modify this figure. Perhaps even aim for 30% debt payment and 20% toward discretionary spending.
And for savings…
This wouldn’t be a recommended strategy for sustaining savings over a prolonged period. The approach tends to place savings on the backburner.
The 50-30-20 guideline is be a great starting budget to work from. We say this, as it categorises your income into three distinct categories and gets you thinking about your personal finance habits and where every dollar goes. The flexibility allows you to modify the approach so you can adjust your savings-spending ratio at your discretion. Once you have a handle and control on your finances it would be recommended to increase your saving percentage if your level of income allows it. Remember a dollar saved is better than none at all.