Savings. We all know they’re important, but 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? Knowing exactly how much you should save can be hard. We often think putting away any amount of money is better than nothing. Usually that is true, but what if we told you that you could have saved way more.
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 when they can
The majority of those people were also saving primarily for vacation (45%) or retirement (42%).
The 50/20/30 rule is a popular one. This means that your savings and spending should be broken down as follows:
- 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 are all necessities.
However, necessities aren’t things like dining out. These are discretionary items that you could technically live without. This could be things like going to the bar, a gym membership, 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 include investments, your emergency fund, and money in your bank accounts. A good emergency fund is between 3 and 6 months of your wages. You can also increase savings by paying off debt and channeling money into profit-earning strategies instead.
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 pay cheque, or are on salary, this should be easy to determine by looking at your previous pay stubs. If your pay cheque differs between pay periods, take an average of the amounts.
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
According to the 50/20/30 rule, 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 looking for deals when shopping for groceries. Remember, your needs aren’t your wants. Wants are discretionary items that 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. Yes, they might be nice to have, but your wants should only be 30% of your income. So, you shouldn’t be going wild with pedicures or 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:
- Latest fashions
- Netflix subscriptions
- Home renovations
- Car upgrades
People often confuse some of these things with “needs”. Be careful you aren’t blowing all your money on fashionable clothing, when your cellphone 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 save.
Step Four: Save 20%
Remember savings can also include debt repayments beyond minimum repayments. Putting your money into paying off debt saves you interest. Once you’ve paid off the debt, the extra money can go towards your emergency fund or your retirement accounts.
To make it easy, we suggest that you make an auto-withdrawal from the same bank account where your pay cheque’s deposited. That way you won’t find an excuse not to put money into your savings. As we all know, it is easy to find other ways to spend your money.
Now why is 20% your magic number here? The reasoning is that it’s the estimated percentage the average person needs to save in order to reach financial independence before they’re too old to enjoy it. For instance, if you want to save 25 times your annual income for a comfortable retirement, it’ll take you approximately 41 years to get to that point if you save 20% of your income each year. Clearly, if you save more it will take less time or you could have even more money.
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!
Here are some inspirational ideas to help you cut costs and save more money:
- Move bank accounts to take advantage of various perks
- Stop collecting, and start selling the 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 a gift for 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 usually cheaper than sodas or other beverages
- Quit smoking cigarettes or marijuana
- 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 last
- Don’t use credit cards for payments
- Use flyers to plan your meals and purchases
- Cancel memberships or choose cheaper ones
- Buy used, when you can
- Buy during major sales like Black Friday or at the end of a season
- Try generic, no-name products instead of brand names
- Rent out unused space in your home (or parking area)
- 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
- Buy a smaller, more manageable house
- Eat less meat
- Start a garden and grow vegetables
- Hit the library to fuel your reading habit
- Make your own beer or wine
- Stick to a budget, even when you travel
What can you do to start saving?
Open a Savings Account
The first thing you need to do to start, is open a savings account. Your savings should never sit in the same account as your spending money. Having savings in a separate account prevents you from spending it. Plus, many banks offer rewards for saving such as cash back or incentives if you don’t touch the balance.
Talk to your financial advisor or bank to figure out which savings account is right for you. A tax-free savings account (TFSA) allows you to make tax-free contributions up to a yearly limit. You can contribute automatically to a registered retirement savings plan (RRSP) and enjoy an annual tax deduction too. Just remember, you will incur tax if you decide to withdraw funds which can be a good incentive to save instead of spending.
Automate Your Savings
Once you have your savings account, the next step is to create your plan. Once you’ve set your budget, you know how much you need to save. Now, it’s a matter of determining how you can automatically funnel 20 percent of your income into various savings vehicles. This could be your savings account, retirement fund, investments, or an emergency fund. Remember, if you don’t see it you’re less likely to spend it.
Don’t forget about your emergency fund. It is meant to handle unexpected expenses such an employment gap, car repair, or medical treatments not covered under our healthcare. This fund is on top of what you need for the long-term for retirement. This guide provides information on how to get started.
What Are You Saving For?
So, you’re saving for retirement, and saving for an emergency, but what else do you want? Do you plan on going on a vacation? Do you want to buy a house? What about a new car or a wedding? You may have several saving goals, so allocate amounts towards each. Include both short and long-term goals into your budget and saving strategy.
Saving is important. Don’t push it to the side, because you don’t see immediate value. It will reward you in so many ways and make you more financially prepared for a happy, fulfilling life.
What are your biggest saving goals?