How Much Should You Save?

Knowing whether or not you are saving enough is a constant concern. The uncertainties of life consisting of its twists and turns can create even more room for question. Financially speaking, the best way to protect yourself from these unforeseen events and to minimize your worry is to have adequate savings.

However, before answering how much you should save, we need to look at how much you can possibly save. In other words, you need to begin documenting your monthly income and expenses.

Start by using a simple budgeting worksheet. Fill in your income and subtract expenses to get a quick estimate on whether or not you have any money left over each month based on your current spending habits. If there is no money left, you need to find ways to immediately cut extra expenses, find discounts, and minimize costs to create money that can be used for savings.

Once you do have some positive net income there are several options. First, a portion of it should be put into cash savings to protect you from unexpected expenses. Another part should be used for making a monthly investment in the stock market. If you are entrepreneurial, another piece should be used for building your business. Further, Jim Rohn recommends that a portion of savings be used to fund your personal development and education.

Like your choice of food at a summer barbecue, the exact portions will vary based on individual preferences. However, just as eating the right amount of quality food will leave you in good physical shape, regularly contributing the right amount into your savings account will put you in good financial shape.

While there is no perfect percentage of money that you should save each month, saving as much as possible should be your goal. As a general rule of thumb, Guy Kawasaki recommends that you save $150 to $250 cash each month depending on your income level. Others have suggested saving percentages around 15-20% of you income. It is important to remember that these numbers are after regular payroll deductions like taxes and 401k contributions have already been taken out of your income. In other words, you need to spend less than 80-85% of your take home pay each month. This will put the odds in your favor for saving enough money to live well.  

Taking the time to write out where your money is going will make a difference. Whether you are in need of financial help or want to find ways to save more, the best action you can take is to start looking at the numbers.

For example, let’s say that you are currently at about break-even each month after subtracting your monthly expenses from your income. If you list out and categorize all your expenses you will be able to see where your money is going and determine where you can begin to cut back. After making some changes, suppose you now have $100 left over each month. This extra $100 each month will amount to an additional $1200 each year in your savings!

Assuming that your savings rate grows at a modest 3% a year, in line with inflation, that means that over 10 years you will have saved nearly $14,000! Think of what you could do with an extra $14,000! This may allow for you to pay off your debts and student loans, start building an investment account, or make more income after funding additional education and professional development opportunities.

Also, consider that this example excludes any compounded interest or capital gains from investing which will increase your savings even more! Hopefully this example illustrates how you simply cannot afford to put off saving.

Start finding ways to save today. A few simple changes can take you from a place of fear to a place where you have control of your money. Following these steps will be empowering and transform your financial well-being.

As always, if you have questions or comments, feel free to send me a message. Thanks for reading.

John