Ever since money took over the barter system, people have always had different opinions about earning, saving and spending. While there might be gazillions of ways to earn and spend, the concept of saving is fundamentally the same across all income classes.
We know that saving money is an essential part of our long-term financial well being. But at the same time, we also know that no matter how much we scrimp, we are hardly left with a few pitiful dollars at the end of each month. Even when we do manage to save a little more than usual, we are not sure if it is enough to ensure financial independence in the future.
So the question remains how much income should I save a month?
While there can be many answers to this question, the simple answer is that you should save as much as you can afford to set aside. Ideally, you should save 20 percent of your income, of which 10-15 percent should go to your retirement accounts. The remaining amount can go to your emergency fund, long-term invests and paying down debt.
Considering this a good rule of thumb, there is still more to answer this question. Let’s look deeper into how much money you should be setting aside for your monthly savings!
Income Should You Save
The amount of money you should save every month mainly depends on your financial goals. So, before you make up your mind to start saving a certain amount monthly, you should take a good look into your goals and your budget. Another important thing to consider is to review your planning around big purchases, like a luxury car or a dream house.
It is important to understand that setting big saving goals like a dream get away or a worry-free retirement might be one thing. But breaking down these long-term goals into monthly savings can be a whole new ball game.
Therefore, the best advice for saving strategies for low income is to set your savings goal at 20% of your monthly income. Most financial management experts believe this as a wise step in your long-term saving goals. This is often also called the 50-30-20 budgeting method. The 50-30-20 method suggests that you spend 50%, save 20% and use up 30% of your monthly income for discretionary spending.
Take $1,000 as your monthly income after taxes for instance. Out of that amount, you would set aside $200 as your monthly savings. You can divert that amount into your emergency fund or any other savings vehicle.
Save for Emergencies
The first thing off the top of anyone’s head when they are asked the reason for saving money is usually for emergencies. This is mostly because financial emergencies hardly ever give you time to prepare for them. Be it a physical injury from an accident or property damage from a natural disaster, any such emergency can lead to hefty bills and lost income if it also keeps you from working.
If you don’t have an emergency fund to make up for these losses, you are probably headed for a financial disaster. Without savings, you will have no other option but to turn to debts to provide for your needs. Now consider the interest you will have to pay on that debt, which means it will take you months or years to pay off the debt. Therefore, the best savings strategy for low income or any bracket for that matter is to set aside a portion of your income for emergencies.
Save for Retirement
The next big chunk of your savings should go to your retirement accounts. While Social Security might provide you some income during retirement, it would be barely enough to meet a few expenses, let alone maintaining your normal lifestyle. This is why it is important to put aside a part of your monthly savings for the time when you can no longer work.
Over the last few decades, pensions have been replaced by 401Ks. This means you are responsible for accumulating enough funds to provide for a comfortable life after retirement. An important thing to remember is that saving money to live for decades to come is no walk in the park. Therefore, you have to consistently put away a good amount in different investment vehicles every month for a copper-bottomed retirement plan.
Save for Investments
While it might seem that your monthly saving goals mostly revolve around emergencies and retirement, the truth is that these aren’t the only things to save for. It is challenging enough to save for worry-less retirement, now add on other expenses like college tuition or vacations among your unplanned expenses and your savings plan is sure to break apart.
For this and many other expenses that you have not planned for or even thought of, you need to put your money to work. To that end, investing is the only way to generate passive income and build up your wealth.
Kakeibo: Try the Japanese Art of Saving Money
Above all, in order to have a sound savings plan, you need to change the way you treat money. Kakeibo (kah-keh-boh) translates as household financial ledger or a budgeting journal. It was invented in 1904 in Japan by a notable female journalist, Hani Motoko. It is a simple, no-frills approach to managing your financial means.
This simple approach of accounting for money emphasizes on mindful spending and savings. Much like bullet journaling, it allows you to focus on the essentials and find freedom from mindless spending that always keeps you a prisoner of your financial limitations.
Here is the book if you’d love to read.
Do not value money for any more nor any less than its worth; it is a good servant
but a bad master. – Alexandre Dumas
The question about how much you should save a month does not have a straightforward answer. Both, the opinions and situations, vary widely for everyone out there. In fact, you might find that the saving strategies for low income completely differ from the ones for higher income brackets.
Despite all the differences, what does remain constant is that if you are unable to save at least 20 percent of your income, you probably need to consider making more money. If you need help managing your spending and savings, download the Doctor Money app for effortless financial management. And remember to have control over your finances or the lack of it will forever control you.