How much should we put putting away in savings?
We are bombarded by advice on why we should be saving more – but how much is “enough” when it comes to filling the piggy bank?
An article from Morningstar UK takes a look at this problematic question.
How much to save, the article tells us, “will depend on a number of factors: what you’re saving for, how soon you might need the money, and how much you can afford.”
Fair enough. The article goes on. “Saving money is important, but not at the expense of putting yourself in financial difficulty. Paying off credit cards or loans should generally take priority over savings, because the interest rates on this type of debt are typically much higher than the interest you can earn on your savings,” the article notes, adding that “a growing debt pile will only wipe out any returns you earn on your savings.” to save.
The article proposes a sort of savings formula, which the writers call the “the 50-30-20” rule.
Through this formula, half of your money – 50 per cent – goes to “necessities, including groceries, monthly bills like your phone, as well as paying your rent and mortgage.”
The next chunk of cash – 30 per cent – should be for “the things you don’t need but which make you happy,” such as dining out or shopping for clothes.
It’s the last tranche of moolah – 20 per cent – that Morningstar UK feels should be directed to saving. “This money can be invested in a pension, put into a rain day fund” or some sort of fixed-income savings vehicle, like a guaranteed investment certificate.
“Chunking your money in this way is an easy strategy to manage your finances because it means you know exactly how much you have to spend and to save each month. It also means that you automatically increase the amount you save when your income rises because you are setting aside a percentage of your money rather than a set amount,” the article concludes.
If, on reading this, you think “man, this just won’t work with my bills,” have no fear, the article says.
“Most of us have bills to pay, student loans to grapple with and families to feed, and this limits the amount of spare money there is to save each month. In fact, it’s estimated that around 40 per cent of Brits in their twenties have no savings at all,” the article notes.
“But the key point is: saving something – anything, however small – is better than saving nothing.”
It’s a great piece of advice. If you can’t save 20 per cent of what you make, it’s not a crime. Start with what you can. Then, when you’ve paid off a credit card or credit line, direct some of what you were paying to savings. You’ll be surprised how the money will begin to pile up.
With our Saskatchewan Pension Plan (www.saskpension.com), we put in a small percentage of our pay, but also winnings from lottery tickets, money from taking back empties, yard sale proceeds – any little extra amounts. The balances in our retirement savings accounts are getting fairly substantial after being at it for 10-plus years, and we have been transferring money into SPP from our registered retirement savings plans. Be sure to check out the SPP – they have the investing know-how and solid track record to help make your retirement savings grow.
Written by Martin Biefer
Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.