You might remember your parents telling you to save money and not spend everything you earn. But have you ever wondered how much money you should save?
The amount of money you should save is generally determined by your income, expenses, and age. But if you are looking for a simple way to calculate the amount of money you should save each month, you might want to consider the 50:30:20 rule.
The 50:30:20 rule is often recommended to savers to help them organise their household budget and make compulsory savings each month. This rule divides your after-tax income into three spending categories: 50% for needs, 30% for wants, and 20% for your savings and financial goals. If you have any ongoing debts, you can further divide the 20% to pay off your debts and build an emergency fund simultaneously. It’s generally recommended to have at least three months’ salary in your emergency fund.
Another way to calculate how much money you should save is by aligning your savings with your financial goals. This can include saving for your emergency fund, building your retirement fund, saving for a vacation, or even a home loan deposit.
It’s important to understand that these are not the only strategies to calculate how much money you should save. You’ll find many tips and tricks online or might want to speak to a financial counsellor to understand your savings goal. Irrespective of your method, calculating how much money you need to save each month can make it easier for you to budget, increasing your chances of hitting your savings goal on time. You should also remember to increase your savings as your income grows to build your nest egg faster.
Top tips to start saving money
Now that you have a fair idea of how much money you should save, here are some tips to help you start saving.
1. Find out where your money is going
Evaluating your current expenses is generally a good place to identify areas where you can save money. You can start by checking where your money is going and writing it down.
Once you have noted down your expenses, you can divide them into needs and wants to decide on areas to cut back on.
2. Stop paying the lazy tax
Another easy way to save money is shopping around for everything because loyalty doesn’t always pay. It’s important to let go of your set and forget attitude and regularly shop around for better deals and discounts. For instance, you can choose not to auto-renew your car insurance. Instead, take the time to compare deals from different insurance providers to make sure your cover matches your needs and you are paying the best possible price for it. It also pays to regularly compare internet plans and energy tariffs from different providers to avoid paying more than you need to.
3. Re-assess your mortgage
If you are a homeowner, you might also want to shop around for a better deal on your mortgage. Even though interest rates have increased across the country, it doesn’t mean you cannot find a lower rate than what you are currently paying.
There is still a wide gap between loan interest rates offered by various lenders, and comparing multiple deals could help you find something cheaper.
When you revisit your mortgage rate, you should also check the features you are paying for and whether you use them or not. For instance, stashing your savings in your mortgage offset account can help reduce the interest you pay on your home loan. But if you have an offset account and don’t use it, you can cut down on the annual fee for a feature you don’t use or need.
4. Automate your savings
A good savings strategy has two parts – living within your means and consistently saving money. To achieve the latter, you can automate your savings by setting up a direct debit to ensure a fixed amount of money is deposited in your savings account each month.
5. Consider using a high-interest savings account
Using a high-interest savings account is a risk-free way to grow your money. High-interest savings accounts help you grow your money faster by offering you a higher rate of interest than regular savings accounts. However, you are generally required to meet some conditions, such as maintaining a minimum account deposit, to earn a higher interest rate.
You can visit any online comparison site to check the interest rates and conditions on savings accounts offered by different banks. It’s also important to understand the fees and charges associated with a savings account to make sure you are not losing money despite earning a high-interest rate on your savings.
6. Invest your money wisely
If you have enough savings to cover more than three months’ expenses, you might consider investing a part of your savings to grow your wealth. However, it’s important to understand that no investment is free from risk, and you need to be well-informed before you decide to put your money in shares or new asset classes like cryptocurrency.
One golden rule to remember while investing is not putting all your eggs in one basket. You want to invest your money in multiple instruments to create a diverse portfolio to minimise your risk. You can read this guide to learn about investing or speak to a financial expert to develop an investment plan that works for you.
