It?s a question that comes up time and time again. How much should I save?
We all want to know whether we?re on track compared with our peers, whether we can let the reigns a little looser or whether we need to tighten our belts. So we ask.
Your financial adviser says that you should be saving 30% of your income but your neighbour (who drives a Range Rover) says they save only 10% of their income. Perplexed you sit down at the computer to let google tell you and you find article after article that will all tell you with absolute certainty that it?s 10%, 20%, 30%, 40% or even 50% you should be saving.
So how much should you be saving?
We need to change our methodology. People have become a little too obsessed with percentages when it comes to savings goals, aligning themselves with a particular ?regimen? like the 50/30/20 rule just as they would when searching for a diet to help them with their weight loss goals.
The thing is, in both cases, what works for one might not work for another. Trying to align yourself to someone else?s recommended ?percentage? is likely to leave you somewhere between struggling (because it?s more than you can afford to put aside) and going backwards (because you?re not putting enough away).
The simple answer is – the optimal savings rate for you is based on your financial goals and how long you are willing to wait to get there. ?You need to identify your goals and then work backwards to determine how much you need to save over what timeframe.
There is no point saving 20% of your income if that will generate you ?X? in savings and you really need ?Y? in order to meet your goals. You can?t pick the route to travel before you even know where you?re going.
Identifying your goals in saving
Start by identifying what the goal is. Are you saving for a house? A holiday? A new car? A wedding? Once you?ve identified what your goals are you can calculate how much you will need to save.
Then comes the how much. Start by taking a look at your budget. Your starting point is what your net position is each month. If you have $2,000 left over after paying your bills each month then this goes towards your savings.
But let?s say you need $24,000 towards a new car, at this rate it will take you 2 years to save. You then have the choice of going back to the budget and working through your expenses to see what can be cut out, re-negotiated or reduced ? to create a greater capacity to save and the ability to reach your goal in maybe 18 months or less.
As you can see, how much you should be saving, depends on what the goal is and how long you are willing to wait to get there.
By adopting this way of thinking, you cannot help but see the flaws of comparing percentages with your peers. We are all saving for different things as different stages of our lives. Younger couples are saving for a house or car, whilst older couples may be saving for their children?s education or even putting money away towards their retirement.
Cost of living varies significantly for all of us depending on where we live, the size of our family and our lifestyle choices. At an individual level, we all have different attitudes towards money, how we spend it and save it and this in turn impacts our attitude towards how we save.
You could comfortably save 10% of your income and reach your goal in 20 years. Or you could save 30% of your income and get there in 12 years. There are people that live off of one income and save the other for several years in order to get ahead financially and save for a house. So comparing how much you are saving to someone else can be futile.
Motivation is one key to saving for your goals
The other competing factor in this equation is motivation. Once you have gone through the process of identifying what your goals are ? you are then able to visualise and articulate what it is that you are saving for. This will motivate you to continue with your saving when you are tempted to give up on your savings efforts. If you are blindly saving 20% of your income because you believe you should be you may find continuing very difficult, but if you have your end goal in mind, you may be saving 30% of your income effortlessly but be able to overcome the temptation to throw in the towel.
Look inward not outward when it comes to your own financial goals. Treading your own path is the only way to get to where you?re meant to be.