How Much Should You Save Each Month?
Have you ever been chatting with somewhere, whether an old friend or a new acquaintance, and they mention some amazing trip they were just on or a new house or car they just bought, and you can’t help but enviously wonder how they afford such a life? Sure, they could have a higher paying job or maybe they fell into some inheritance, but perhaps they are simply better at saving money than you. Here’s the simple secret, though: Being “better” at saving simply means being more committed to it. Saving should be percentage based, not a set number based on your age or income. What’s that percentage? No less than 10% of your income.
That means that if you are pulling in $3,000 per month, you should be putting away at the very least $300 towards savings every month. When my wife and I were saving for our wedding and honeymoon, we were putting away over a third of our paychecks. Because we had been responsible savers in the past as well, setting aside over a third of our combined income didn’t stop us from living with a certain amount of freedoms. During that time of intense savings, we were still able to downgrade to just one income and move to London for four months before our wedding in Hawaii and honeymoon in Thailand.
Getting to that point definitely takes some training and dedication. Perhaps the most important step to take is to make sure you aren’t spending more than you should be every month on rent. Many financial advisors profess the 50/30/20 rule. That means 50% of your income should be spent on essentials like housing and food, 30% should be allocated for lifestyle choices (things like nights out, cable TV, etc), and 20% should go towards financial priorities like student loans and savings. Personally, I would switch the 30% and 20% allocations, in order to maximize the amount I can save after my other financial priorities like my students loans and health insurance.
An important key to maintaining an ever-increasing savings is to not let your lifestyle outgrow your growth in income. For example, getting a 10% raise at work shouldn’t mean that you move into an apartment that costs 15% more because now you’ll have even less money at the end of the month than you did before your raise. To be really financially smart, you shouldn’t increase your lifestyle at all when that raise comes. If you’ve been struggling in certain areas, sure, make yourself comfortable now that you can, but don’t see money as something that needs to spent as soon as you get it.
If you’ve been living paycheck-to-paycheck, putting nothing away in savings, perhaps it’s time to look over your finances again. Maybe you’re spending too much money eating out or on night life activities. Perhaps you should consider living in a more modest home or apartment. Savings are vital as there are always going to be things we want and need as well as unexpected emergencies. The next time you’re at a gathering talking to someone, perhaps you’ll be the one brimming with pride at your new car or reliving your two week trek through Tuscany.