Saving money is important. Whether you’re putting money into your retirement savings plan (RRSP) or saving for that car upgrade or bucket list trip. However, knowing and understanding how much you should be saving can be confusing. Naturally, saving money isn’t always fun. When you have money, you want to spend it, you don’t want to hide it away in an account that you may not access for years. But saving money is incredibly important. It can help you reach your goals, both short and long-term, as well as help you save and plan for your future.
In 2017, a study was conducted among 1,523 randomly selected Canadian adults where 85% of Canadian citizens agreed that they should be saving more money than what they were. BNN reported that 85% said they “need to save more money”, and 79% of respondents between 35-54 said they were worried about not having enough money to retire when they wanted to. With 65% of those surveyed also stating that they lack a savings plan at all.
What does this mean? It’s evident that people know they should be saving more but can they afford it and how? How do you make sure you aren’t in the 65% without a plan? One of the biggest reasons people aren’t saving more is because they feel they aren’t earning enough income, they are caught by surprise with unexpected expenses, or they are already struggling to pay their everyday expenses, let alone taking some of that money to put aside.
Saving can cause stress. We all know we need to do it, but are we doing enough? How can we do 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 what they can
The majority of those people were also saving primarily for vacation (45%) or retirement (42%).
Although this gives you an idea of how much people, on average, have saved, this doesn’t necessarily tell you how much you should be saving.
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
Your needs would be considered those bills that you absolutely need to pay and are things that you need to survive. This includes rent or your mortgage, car payments, groceries, insurance, debt repayment (the minimum), utilities, etc. This category doesn’t include extras such as dining out, or your Netflix subscription.
Your wants are all the thing you spend money on that are not essential. For example, this can include entertainment like dining out, that new sweater you’ve been eyeing, tickets to a concert, a vacation, or a new phone upgrade. Your wants can also include upgrades you make that are necessary like purchasing a Mercedes instead of a Honda, or signing up for cable or Netflix, versus using your internet to stream television.
Lastly, your savings and investments include adding money to your emergency fund, making contributions to a mutual fund or investing in the stock market. Savings can also include paying back your debt. Yes, minimum payments for your debt is considered a “need”, but extra payments to try and lower it quicker, can be a saving.
So where do you go from here? Follow the steps below…
Step One: Calculate Your After-Tax Income
Your after-tax income is what remains of 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 you are self-employed, this may look a bit different. You’ll need to take your gross income, minus your business expenses, and minus anything you put aside for your taxes.
Step Two: Limit Your Needs
Now go back to your budget, if you don’t have one, create one! Take a look at how much you spend on your needs each month. Things to include are:
- Car insurance
- Other insurance like health or home
- Regular medical expenses like prescriptions
Remember, only 50% of your income should fall towards your needs. If you come in over, take a look at what can be adjusted or where you can save costs. Maybe it’s calling your local car insurance company to see if there are better options, or deal shopping when doing groceries. Remember, your needs aren’t your wants. Wants are things you can live without like cable, needs are things that can severely impact your life if you aren’t putting money towards them.
Step Three: Limit Your Wants
This is one of the easiest categories to cut down on because you don’t need any of the things that fall into this category. However, don’t start going wild on manicures and that trip to Thailand, remember how strict we were in the “needs” category. Your “wants” are going to include all those things that didn’t fall under there. For example, your cell phone bill, cable or Netflix subscription, home renovations, etc. Before you know it, more of that 30% on your wants may be taken up by those things you once thought were needs.
Step Four: Save 20%
Now let’s get to the saving. Note that this can also include debt repayments outside of your minimum repayment amount that falls under “needs”. This includes any additional car payments you make, or payments to your credit card that are outside of your minimum repayment amount. This 20% may go into your emergency fund, and/or your retirement accounts as well. To make it easy, you may want to 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.
You’re probably wondering why 20%? And the reasoning behind this 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. Provided you want to save 25 times your annual income to live comfortably when you’re retired, it’ll take you approximately 41 years to get to that point when saving 20% of your income each year. Obviously the less, or more, you save, the longer or shorter that amount of years is. So ask yourself: What’s your end goal? 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
Saving money is important. It’s important for your future, and to be able to live the life you want to lead now, while also preparing for your future. Many people think that they don’t need to start thinking ahead to retirement, but the sooner you start the better. Using the 50/20/30 rule can be a great place to start when it comes to determining where you should be allocating your money. It can help you stay on track, and not overspend in the wrong areas so you can maximize your savings.
The 50/20/30 rule is a great starting point for a budgeting novice, it makes your steps clear and provides for savings, investments, and other financial goals. This makes it more likely that you’ll stay on course over time, and reach the financial stability you’re hoping for. When you get to a point of confidence, there is room for flexibility in the percentages based off what you want to save, however, note that you shouldn’t be moving that 20% savings down without knowing that will increase the timeline for reaching your financial goals.
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