If I was to rank the type of questions I am most frequently asked, then “How much should I be saving on a regular basis?” is certainly in the top five. And my answer is always the same – as much as you can.
There is actually no ideal percentage of your salary or set amount that you should be saving each month; it really comes down to what a person can comfortably afford each month.
I have been working in the financial services sector for the past 26 years and I can’t recall anyone ever telling me that they ever regret having saved too much.
I have met plenty of people though who regret not having saved more, whether that was for retirement, for their children’s education or into their emergency fund.
Regardless of your motivation to save for short or long term goals or even if you have no particular objective, the reality is that everyone’s financial circumstances are unique.
We all have different goals, aspirations and levels of motivation. The reason why my answer is always “as much as you can” is because I know saying 5% of your income or 10% to people is just wrong; there is no one size fits all solution to this question.
Yes I firmly believe that everyone should set aside a certain amount of their income each month into a regular savings account, but people need to figure how much is right for them and I am going to try to help you with this now.
The first question I want you to ask yourself is how much could you save? And in order to answer this you need to just subtract your income from your outgoings and any surplus left over is the amount you could save each month.
Now if there is a surplus ask yourself how much you could comfortably save? And the reason I am asking this question is that for some people they think that saving is denying them the ability to have fun i.e. spend in other areas.
So, it is important to leave room that allows you to have some “guilt free spending” each month as well as factoring in for unforeseen expenses that will undoubtedly happen from time to time.
When you save the amount remaining in your account after you deduct your income from your outgoings it could leave you with very little wriggle room and for some people that can feel restrictive.
So it is important to not set yourself up for failure from the outset - set yourself up for an amount that you can stick to, one that is sustainable over time.
Having said that you also need to find your “pain point”. This is a term coined by the excellent financial writer Sarah Milton which is the amount you can save each month that hurts a little but not too much.
If you opt for a savings figure that doesn’t hurt, then you have set the bar too low. If you choose an amount that puts you overdrawn each month then you have set the bar too high.
Ask yourself a simple question: “If my salary was €50 less next month would I notice?”. “If my salary was €100 less would I notice?”. At some point you are going to come up with a number that makes your stomach tighten and when that happens, that’s your pain point.
The key thing here is to get started, no matter how small the amount is. To start off with, pick a number that is manageable and once you get used to not seeing that from your pay cheque each month, gradually build it up over time, increasing it maybe from €100 to €125 and then to €150 and so on.
This will help you to get used to the initial amount that is being debited from your account/salary each and when you choose to increase the amount it won’t be such a shock to the system either.
In order to help you save more, here are some tips that might help you.
Set up a monthly budget
Without a budget or spending plan, trying to save and identify the amounts you can, are that much harder. You will end up saving irregularly and after a while not saving at all. Having a budget in place will also identify and create awareness of other areas you might be spending too much on or not getting enough value which could then be redirected towards your savings.
Automate your savings
The term “pay yourself first” was first used by a financial guru in the States called David Bach but he is absolutely right. If you pay yourself first i.e. save before you pay anyone else and treat savings like a monthly expense that has to be paid, then you are going to be successful.
To help you with this if you can have your savings automatically debited from your salary or taken from your account the minute it reaches it then you are taking the risk out of leaving it to yourself to do it
Go 50-50 with bonuses
If you get a bonus at Christmas, spend 50% of it and save the other 50%
The next time you get a raise, or your take home pay increases for any other reason – see the recent budget changes - save the extra amount you are getting. This is slightly harder than saving a once off bonus amount because when people get an increase, they spend it as fast as it arrives in their account and after a couple of months they have no idea where the extra money went. It just gets swallowed up on other areas and they wonder how they ever managed before they got the increase
This is a concept I heard of a number of months ago from a client of mine – she and five friends save €25 each week and every month one of them takes the total amount saved i.e. €500; it means they are forced to save each month because they can’t let their friends down
Be a piggy bank saver
At the end of every day I take the change out of my pocket and I put it into an empty five gallon water dispenser – by the time it is full I have about €95. And you know if you can save €0.55 cent per day, you will have €200 at the end of the year