How Much Of Your Income Should You Save?

we talked about financial goal setting. Setting goals for the short term, for the medium turn, and for the long term. Typically you don’t achieve goals by chance, and certainly not financial ones. It’s smarter to go about it in a systematic way. For you to achieve your financial goals you’ll have to start putting money aside. Even if you’d get a massive bonus, win the lottery, or get an unexpected inheritance, you’re not getting any closer to your goals if you spend it all.
So, how much money should we set aside? Well, the unpleasant answer is: it depends. Depends on what? Well, on your goals. And on your income. But if you want a quick answer that can get you started today, I have some shortcuts. In a nutshell, I recommend you save at least 15% of your net income for short-term expenses. Then add another 15% if you also want to save for the medium and the long term. Let me explain what that looks like.
The very least you should do: save 15% for irregular expenses
The very least you should do, is make a savings account for irregular expenses. Every month, you’ll transfer 10% of your net income there. If I get €3,000 net income per month, I’ll transfer 15% x €3,000 = €450 to this account every month. You’ll use this account to pay for irregular expenses. Irregular expenses are things you don’t pay for on a monthly basis. Things to include could be vacations, Christmas gifts, your annual water tax, etc. If you read my previous post on setting financial goals, this savings account for irregular expenses would fall into the short-term category.
This should live in a separate savings account, so that it’s easy to see what goes out. Try not to eat into this savings account for things other than irregular expenses. It helps to determine upfront what these irregular expenses look like, and especially what they don’t look like. For example, don’t see this money as wiggle room to spend on a couple extra nights out. When you go out, it should come from your checking account in such a way that you can still pay all the other regular expenses from that same checking account without having to eat into this savings account.
If you want to be even smarter about this savings bucket, split it up! You can split it between irregular events and unknown irregular events. This is something I love to do. I think of all these known irregular expenses that don’t follow a monthly cadence but that I know will happen. For example, I do my gym subscription payment once a year in April. Every month I automatically save 1/12th of that amount towards a special savings account for my gym membership. If you add them all up, and divide it by your net monthly income, you will get a certain % of your net income. This does not have to be exactly 15%. But for sure, you still need a separate bucket for the unknown, irregular expenses. Think of for example traffic tickets, wedding gifts, and medical bills. If you split up these savings between known irregular and unknown irregular events, make sure that the unknown irregular events bucket gets at least 10% of your income. It’s good for your emergency fund to have 2–3 times your monthly net income, and by saving 10% of your net income each month, you’ll be building towards that.
If you want to achieve more, save another 15%
As I mentioned, 15% savings bucket is mostly for short-term expenses. If you want to be more ambitious and look beyond the short-term, you want to save more than the 15% we discussed earlier. In fact, I recommend you save at least another 15%. That means, you’ll save around 15% for your short-term expenses, and 15% for the medium and long term. Which means, 30% of your net income. If you make €3,000 (net), that means you save 30% x €3,000 = €900 each month. You save €450 for short-term expenses, and the other €450 for the medium and long term. The medium and long term have things like a wedding (yes, even if you’re not engaged, who knows where life takes you?) and (early) retirement. In a year, that means you save 12 x €450 = €900 = €5,400 towards your financial goals. Not too bad!
Now of course, it all depends on your financial goals whether this amount suffices. There are people who make it their life mission to save as much as they can, so they can retire very early, for example. There is a whole movement around this called FIRE (stands for F inancial I ndependence, R etire E arly). That means choosing a lifestyle very different than most people you know. Although I’d love to be able to retire whenever I want and be financially independent like that, I’m not prepared to save 70% of my income. How much you save beyond the 15–30%, is a very personal decision.
Keep your savings accounts separate
Now I touched upon this a little bit, but it’s important you keep savings buckets/accounts separate. It makes your money flows more easy to track. With that, it allows you to make more conscious spending choices. The least you should be doing is to keep your savings for short-term, irregular expenses separate from the rest of your money.
The more you split up your savings accounts, the more conscious you’ll be choosing to spend on X versus on Y. So if you also save for the medium and the long term, I recommend you keep that separate from your short-term savings. Even better, also split up your medium-term savings (your wedding, saving for a house down payment) and long-term savings (early retirement) into different buckets. Then if you get married, and saved to spend €10,000 on that, then that’s all you have to spend. If you consider spending more (which is sooo easy), that means you’d consciously be making the choice whether to compromise the goal of being able to buy a house to do so. Making that choice will always be up to you, but it’s important you’re giving yourself the chance to make it consciously. With this you’ll prevent yourself from being surprised that you have no money to pay for your home down payment 2 years later. You can decide now whether spending the extra €5,000 on your wedding is worth to wait another 2 years to buy that house, or not.
Many banks offer the possibility to have several savings buckets even with 1 savings account. If your bank doesn’t offer that possibility, consider switching to a bank that does, open multiple savings accounts if that’s possible and not too expensive. For example, with my ING checking account, I can have up to 10 savings buckets. Other banks even offer an unlimited number of these. I have around 15 savings buckets now, the extra 5 I needed beyond the 10 from my first checking account I got by, opening another checking account at the expense of €1.55 per month. For me, I’m happy to spend that money to have my system run smoothly.
What about loans?
Now what if you also have loans you need to pay off? There’s no perfect answer to this, but you can use this rule of thumb.
- Is it a mortgage or a student loan, and is the interest <4%. Simply keep paying these off at the prescribed rate, and consider the 15–30% savings rule from above as separate. For example you make €3,000 you may be paying €800 for your rent, another €100 for your student loan. Then still you save 15–30%, or €450-€900 per month towards your short-term, medium-term, and/or longer-term savings buckets.
- For any other loans, pay them off while still having some cash reserve. Do it like this:
- If you can make it work to save the 30%, still save 15% towards your short-term savings bucket (irregular expenses), and the other 15% towards your loan until it’s paid off. Once you have paid off the loan, now redirect the 15% towards your medium- and long-term savings buckets.
- If you cannot afford to save 30% (but really, challenge yourself to try), then use 50% of the 15% for your loan repayment, and the other 50% for your short-term savings. Again, if you make €3,000, that means you pay 50% x 15% x €3,000 = 7.5% x € 3,000 = €225 towards your loan, and save €225 for short-term irregular expenses.
DO NOT take on any additional consumer loans. Do not use your credit card to allow for increased spending a certain month. Want a new Tv, and don’t have the money? Wait for it. Do not take a loan.
If you’ve landed on your final savings percentage, bravo!! Still, at times you may find it challenging to save this much. What certainly helps is to put the money in your savings account as soon as your salary hits your bank account. Then you don’t accidentally spend money that was meant for saving. But even if you do this, especially for the first time, you may find that at the end of your money, you still have some month left. Oops! It may be time to think about setting yourself a (rough) budget. We’ll get to that in a later post. TTYS!
PS: Are you curious to see how your savings can build up over time? I’ll talk about this more in depth in my next post, but I’ve already created a free calculator for you to play around with. Have fun!
Originally published at https://www.juliamenheere.com.
