You don’t need us to tell you how important it is to build your savings. However, how do you know if you are saving as much as you should be? Even if you are putting away money on a regular basis, are you doing all that you could be doing to build up those savings? Knowing exactly how much you should be saving can be hard, and often we think that putting away any amount of money is better than nothing. Which is true. But what if we told you that you could have way more saved than you do?
Let’s break things down for you on how much people are actually saving on average. In a BMO study, 32% of the 1,000 surveyed stated they had less than $10,000 saved. Of those people, there was an even split between what their plan of attack was when it came to saving:
- 31% had a fixed savings plan, including monthly contributions
- 32% had a rough plan, dependent on cash flow
- 32% simply save what they can
The majority of those people were also saving primarily for vacation (45%) or retirement (42%).
The 50/20/30 rule is often a popular one. This means that your savings and spending should be broken down by the following:
- 50% of your income should go towards necessities
- 20% of your income should go towards savings
- 30% of your income should go towards discretionary items
Necessities are things that you absolutely have to pay and that you need to survive. For example, your rent, mortgage, car payments, groceries, and insurance. This doesn’t include things like dining out, or your gym membership.
Your wants however are all the things you spend money on that you could technically live without. This could be things like going to the bar, that new pair of pants, tickets to a movie, a vacation, or a new phone. Your wants can also include upgrading your basic car to something fancier, or signing up for cable or Amazon Prime.
Last but not least, your savings and investments include adding money to your emergency fund, and making contributions to a mutual fund or investing. Savings can also include paying back your debt.
So where do you go from here?
Step One: Calculate Your After-Tax Income
This is what remains after your paycheck after taxes and deductions. If you get a regular paycheck, or are on salary, this should be easy to determine by looking at your previous pay stubs. If your paycheck is different each week, then calculate the average pay you get.
Step Two: Limit Your Needs
Now it is time to go back to your budget and figure out how much you spend on your needs each month. Don’t have a budget? Here’s a great article to read to get started on creating one. Things you should be looking at in your needs category will be things like:
- Car, home, or health insurance
- Medical expenses like prescriptions
- Minimum debt repayments
An important thing to remember here is that rule of 50/20/30. You should only be putting 50% of your income towards your needs. If you are over 50%, take a look at what can be adjusted or where you can cut costs. Maybe it’s calling your local car insurance company to see if they have better options, or deal shopping while doing groceries. Remember, your needs aren’t your wants. Wants are things you can live without.
Step Three: Limit Your Wants
This is the easiest category to cut down on because you don’t need any of these things to survive. Even though, yes, we know they are nice to have. Your wants should only be 30% of your income. So you shouldn’t be going wild with pedicures, and trips to faraway places unless you can afford it. Remember, wants aren’t just fun things like dining out, and trips. They also include things like:
- Your cell phone bill
- Netflix subscriptions
- Home renovations
- Car upgrades
People often confuse some of these things as “needs” but they do in fact fall under wants. So you’ll want to be careful you aren’t blowing all your money here on clothing and forgetting about things like your cell phone bill which may be more valuable to you. You can’t always get cash when you need it, so restricting this area of your budget will help you have room for savings.
Step Four: Save 20%
Now last, but not least, savings time! Remember that savings can also include debt repayments outside of your minimum repayment amount that falls under “needs”. This can also include additional car payments you make, or payments to your credit card that are outside your minimum repayment amount. This 20% may go towards your emergency fund, or your retirement accounts as well.
To make it easy, we suggest that you make an auto-withdrawal from your account that your paycheck goes into each month so you don’t ever find excuses not to put money into your savings. Because we know, there will always be excuses or things you think are “more” important.
Now why is 20% your magic number here? The reasoning is that it’s the estimated percentage that the average person will need to save in order to reach financial independence before you’re too old to enjoy it. If you want to save 25 times your annual income to live comfortable when you’re retired, it’ll take you approximately 41 years to get to that point when saving 20% of your income each year. The less, or more, you save, the longer or shorter that amount of years is. So ask yourself what your end goal is. How long do you want to work for? If the answer is as short as possible, get saving!
To give you some ideas on where you can cut costs to save more, here’s some inspiration:
- Move bank accounts to take advantage of different perks
- Stop collecting, and start selling, all those things you thought be worth a ton of money one day
- Sign-up for free customer reward programs to help you save in the long run
- Go DIY when you need to give a gift to someone
- Use the 30-day rule when it comes to purchases, if you still want it after 30 days, then consider buying it
- Write shopping lists and stick to them
- Invite friends over instead of going out
- Get clothing repaired versus replacing it
- Drink more water – it’s free in a lot of places, and is cheaper than sodas or other beverages
- Quit smoking, smoking weed, or other expensive habits
- Meal prep for the week so you don’t eat out when you’re busy
- Turn off the lights and put on a sweater versus turning up the heat
- Buy quality appliances that will last
- Don’t use credit cards for payments
- Use flyers to plan your meals and purchases
- Cancel unused memberships or lower your membership to a less expensive one
- Buy used when you can
- Shop around major sales like Black Friday or at the end of season
- Try generic, no-name brands instead of brand names
- Rent out unused space in your home (or parking spots!)
- Check out free events and offerings in-town versus spending money on entertainment
- Take public transportation or better yet, walk!
- Buy staple products like laundry detergent in bulk
- Make your own cleaning supplies versus buying them
- Buy a smaller, more manageable house
- Eat less meat
- Start a garden with vegetables so you don’t have to buy them in the summer months
- Hit the library to fuel your reading habit
- Make your own beer or wine
- Have a budget even when you travel
What does your savings account look like?
Open a Savings Account
The first thing you need to do to start saving is to open a savings account. This is your first step. Your savings should never sit in the same account as your spending money. By having it in its own account, it’ll prevent you from spending it, plus, many banks offer rewards for saving. Aka money back, or incentives that allow you to save more the longer you keep your money untouched, and the more you save. Talk to your financial advisor or bank to figure out what the right savings account is for you. A tax-free savings account (TFSA) for example will allow you to make contributions that are not deductible and any amount you contribute is generally tax-free. There’s also registered retirement savings plans (RRSP) which are great for saving for retirement or bigger purchases like a house. Taking your money out of an RRSP isn’t always the easiest. It’s designed that way to help you save more.
Budget For Saving
Once you’ve set-up your savings account, the next step is to create a plan, which we discussed above. Figuring out your budget and how much you are able to save, and how often, will allow you to have a plan of attack for saving. Keep in mind that 20% rule.
Don’t forget about your emergency fund. Just because you have a savings account of some sort, doesn’t mean you have an emergency fund. These funds are for if an emergency comes out of nowhere that you weren’t prepared for that may have a cost associated with it. This could be a health expense, unexpectedly losing your job, your car breaking down and you needing a new one, the list goes on. Everyone should be saving for both the long-term (like an RRSP for retirement) and for the short-term in case something happens. This guide can help you get your emergency fund on track.
What Are You Saving For?
So you’re saving for retirement, and saving for an emergency, but what else do you want to save for? Do you plan on going on a vacation one day? Or buying a house? Or buying a car? Getting married? Don’t forget that you may have several saving goals and it’s important to keep all of them in mind when saving. Ensure you work your top short and long-term saving goals into your budget and saving strategy.
Saving is important, and it’s important to not push it to the sidelines because you don’t see the immediate value in it. We promise you that by having a savings plan, and working to achieve it will be incredibly valuable for you and help you feel and be more financially prepared for your life.
What are your biggest saving goals?