When someone asks how much money they should save each month, we in return would ask,
“What are your savings goals?”
The ideal savings rate really depends on your specific, long-term reasons for saving. There are three timelines you should consider:
Timeline 1 : Less than 1 year
Your short-term savings can ne used to go on a vacation, buy gifts or pay your taxes.
Timeline 2 : Less than 1 decade
You might use this money to replace your refrigerator, fix your car, cover a major insurance deductible, setting up a buffer when you’re between jobs and make a down payment on a home.
Timeline 3 : Lifetime
Retirement is the ultimate long-term savings goal.
Now back to the original question: How much should you save a month? Let’s break this down by goal:
i) Retirement
You should consider saving 10 – 15% of your income for retirement. Sounds worrying and difficult? Don’t worry: you’re already doing it if you’re working and you have an Employee Provident Fund in place. So make sure that you have this in place.
ii) Emergencies
You should also consider establishing an “emergency fund” that can cover 3-9 months of your living expenses.
How can you save such a large sum? First, calculate your monthly cost-of–living. Assume that if you lose your job, you’ll sacrifice life luxuries such as internet TV subscription or manicure. How much do you need to survive?
Divide that number in half. Can you save this month? If so, you’ll build a six-month emergency fund within the next year.
iii) Everything else
Make a list of major expenses within the next decade, ranging from replacing your car to throwing your wedding. (If it’s easier, list broad categories like “home repairs,” “holidays” and “wedding.”)
Write your ideal savings goal target and deadline. Divide by the number of months remaining to see how much you should save. Want to pay cash for a RM40,000 car in five years? You’ll need RM667 per month.
When you run through this exercise, you’ll probably discover that you can’t save enough for every savings goal on your list. You now have four options:
- Re-imagine your savings goals
- Lengthen your timeline
- Cut your current spending
- Earn more
Most people opt for a combination of those four choices. You might decide you’d be happy buying a RM20,000 car, which will require only RM333 per month. You cut your RM90 Netflix and Spotify bill and pick up a one or two day freelance job per month, and voila — now you’re on-track to pay cash for your next car.
50/30/20 rule
Here’s a final rule of thumb to consider: at least 20% of your income should go towards savings. More is fine; less may mean saving longer.
At least 20% of your income should go towards savings.
Meanwhile, another 50% (maximum) should go toward necessities, while 30% goes toward discretionary items.
This is called the 50/30/20 rule of thumb, and it provides a quick and easy way for you to budget your money.