How much of my paycheck should I be saving?
As much as the 50-30-20 savings rule might seem simple, life is more complicated than that. Learn some tips to manage your savings, according to your own lifestyle.
1. Look closely at your goals
- Short-term goals (expenses with less than a year)
- Medium-term goals (within less than a decade)
- Long-term goals (10 years or more away)
Lastly, the third category is mostly for retirement, but also other goals you may have, like buying a second home.
2. Put some deadlines on it
After you define your goals, you need to create a list with the deadlines, check how much you need to reach in your timeframe, then divide that timeframe by the amount of money you need for each goal. For instance, if you need to build $15,000 to replace your kitchen in two years, you'll need to put aside $625 each month.
Once you’ve run this calculation with every goal on your list, you may find that you can’t save enough, or need to keep more than your income to fulfil all your ‘wants’. So, what can you do?
The beauty about this model – is once you have achieved your short term goals you can simply flick your savings straight into your long term goals.
3.Reassess your goals (bar one)
Figure out exactly what you could save every month, and how that lines up with your short and medium-term savings goals. You may need to reconstruct your goals and amounts to fit with the realities of your life.
Keep in mind the one non-negotiable thing: your emergency fund. Regardless of what you’re spending on, make sure you always try to have at least three months’ worth of bills and expenses on hand for the unexpected. Then, check in on your emergency fund yearly, to accommodate rises in the cost of living and new financial obligations.
Don’t overlook the more distant future. As much as it’s saving for a time so far in the future that many can find it alien, retirement savings are the best determinate of wellbeing in later life. Many financial professionals suggest siphoning between 10% and 15% of your income towards it, which for many New Zealanders may sound unattainable. Still, that rate can be affected by numerous circumstances, such as how much you earn and when you begin saving.
4. Overcome the common barriers to money-saving
- Lack of budget: As we’ve seen, the first step to saving money is to create a clear and, most importantly, realistic budget. Without it, it can be easy to overspend and have little left over for savings.
High expenses: If your expenses are high, it can be difficult to save money. Of course, not every expense can be reduced, but you’ll be surprised at the difference that a few key cuts here and there can make over time. Consider switching providers, cooking meals at home instead of eating out, or cancelling subscriptions you don’t use. You can also look for ways to earn extra income, like taking on a part-time job (if you have time!) or selling items you no longer need.
Debt: Another major barrier to saving money is having high-interest debt, such a credit card. That’s why it’s important to pay it off as soon as possible. Many people use the ‘debt snowball method’: essentially, you pay off your smallest debt first and then apply that payment to the next smallest debt. This strategy can help you build momentum and pay off your debts more quickly.
Lack of discipline: Yes, saving money requires discipline. One way to streamline your efforts is to automate your savings. If you set up automatic transfers from your main bank account to your savings account each month, you won’t have to think about saving money: it will happen automatically.
Impulse buying: Do you often find yourself buying things out of impulse? Treating yourself every now and then is not a bad thing per se, but it becomes a problem if it consistently derails tour savings goals. To avoid the temptation, create a shopping list before you head to the supermarket or go shopping – and of course, stick to it. Another good idea is to give yourself a waiting period before making a purchase: if you still want the item after a few days, you can consider buying it.
The bottom line