How Much of My Income Should I be Saving?
When it comes time to set up or review your budget, you might find yourself wondering, how much of my income should I be saving? While plenty of frameworks and suggestions are floating around, there is no hard and fast answer, as everyone’s income and outgoing payments are different.
However, if you’re looking for tips on how much of your income you should save, read on!
How your savings rate influences retirement
Your savings rate is the number one factor that affects your ability to retire early. Making the most of your income and being smart with your savings can significantly bring forward your retirement date.
It also refers to the amount of cash you can save (often this is measured annually) from your pay cheque expressed as a percentage. For example, if you earn $100k after tax per year and can save $20k, your savings rate is 20%.
Working with FIRE
You may have seen the FIRE acronym floating around, but do you know what it stands for? In financial speak, FIRE stands for Financial Independence Retire Early. These are often broken into two parts.
The financial independence aspect of this acronym is about having enough personal wealth to live without needing to actively work for basic necessities. If you’re financially independent, your assets will generate more income than your expenses.
The retire early part of the acronym doesn’t necessarily mean you stop working altogether. Rather, it means you have the freedom to pursue meaningful work of your choice, regardless of if it’s paid or unpaid.
Retiring in 10 years with a 60 per cent savings rate
Having a 60 per cent savings rate and retiring in 10 years sounds almost too good to be true – but the truth is, it’s achievable for most people. Taking the time to analyse where your money is going is the crucial first step. Once you have this, you can focus on simplifying your living to reduce your spending. This means not constantly upgrading your phone or car or even renovating your house to keep up with the latest trends.
By saving 60 per cent of your income and living a simpler lifestyle, you’ll be able to build up your savings account through funds deposited and accumulating interest. Chat with an Inovayt financial advisor to see how lowering your living expenses can significantly reduce the time it’ll take for you to retire.
What percentage of your income should be spent on your mortgage/rent?
One of the most common questions the Inovayt team hear is about how much of your income should be spent on mortgage or rent. While there is no right or wrong answer, there are a few things to consider.
The 30 per cent rule
One of the most common ‘rules’ you’ll see relating to this question is the 30 per cent rule. This stipulates that you should allocate 30 per cent of your income to the rent or mortgage. However, doing your own research before blindly following this rule is important, as it is pretty outdated and doesn’t consider the whole picture.
Some flaws associated with the 30 per cent rule include the following:
- Not looking at the bigger picture.
- Inflation isn’t taken into consideration.
- For high-income earners, this doesn’t make sense.
- It doesn’t consider your financial goals.
As previously mentioned, there is no one-size-fits-all when it comes to this question. However, you’ll ideally not want to spend more than 50 per cent on all your living expenses. This includes your mortgage/rent, groceries, utilities, etc.
The 50/30/20 rule
If you’ve looked into how much of your income you should be saving, you’ve probably come across the 50/30/20 rule. This refers to the following:
- 50 per cent of your income goes to basic living expenses like housing, food, and power bills.
- 30 per cent is allocated to your ‘wants’. This is things like eating out, streaming site subscriptions and gym memberships.
- 20 per cent should go straight into savings for your long-term saving goals.
For example, if you make $1,000 a week, you would allocate $500 to living expenses, $300 for ‘fun’ stuff and $200 into savings. Remember that the 50/30/20 method is another guide and will depend on your financial situation.
What if I can’t save 20 per cent of my pay cheque?
Sometimes, those who look at adopting this framework will realise that they can’t allocate 20 per cent of their pay slips to savings. As previously mentioned, this framework is a guide only and may not work for your financial situation..
Figuring out your ‘why’
When it comes to saving money, defining your ‘why’ is crucial. If you don’t understand why you’re contributing money to your savings or have a goal you’re working toward, you often won’t be motivated to add to your savings.
By working with an Inovayt financial planner, you’ll be able to establish your long and short-term financial goals, which will inspire you to put positive saving habits in place. Some examples of financial goals include:
- Buying a house
- Building your investment portfolio
- Paying off debt
- Saving for a significant future expense
- Saving for retirement
Setting up an emergency fund
Many people are under the impression that your savings account and emergency funds are one and the same. This is not the case. Having around three to six months’ worth of living expenses set aside in an emergency fund is crucial. Your emergency fund (as the name suggests) is there in case of emergency. This includes unplanned medical bills, expensive vet bills, car breakdowns etc. It’s also there for more severe things, such as being laid off from work, experiencing a death in the family or a marriage breakdown. Having this money set aside can make a difficult situation slightly less stressful. Be sure to keep your emergency fund and savings account separate and avoid dipping into them. Remember, your emergency fund is for emergencies, and your savings account is for your goals – taking money from them means you’re hurting your ability to reach your goals and plan for the future.
Tips for saving more each month
When considering your savings, it’s easy to believe that the more money you earn, the easier it’ll be to save. This is not the case. While high-income earners can be at more of an advantage, our self-control often gets in the way of adding to our savings. In a world where impulse buying and instant gratification play a significant role, we usually opt for short-term happiness over long-term satisfaction. Here are some tips on how to save more each month to reign in your negative spending habits and add more to your savings.
- Set up an automatic transfer to your savings account on the day you get paid. This way, the money will be gone from your spending account before you can use it.
- Make your coffee/tea/smoothie at home to save regular daily expenses. Although these are often small costs, they add up if you purchase multiple daily.
- Try meal prepping your lunch and dinner for the week. Not only does this save time, but it’ll help you avoid spending on last-minute takeaway meals.
- Cancel any subscriptions you have but don’t use regularly. This includes streaming, the gym, etc.
- Keep an eye out for sales at the supermarket and discount codes when shopping online.
The nitty-gritty of savings
If you constantly find yourself asking, “how much of my income should I be saving?” you’re not alone. When it comes to saving, this will look a little different for everyone as your living expenses and salary is unique. If you’re unsure what percentage of your income to save or are struggling to build your savings, get in touch with one of our expert team financial advisor members today.