This article is written as part of a DollarsAndSense.sg collaboration with For Tomorrow. For Tomorrow is brought to you by Temasek, in partnership with MoneySmart and DollarsAndSense. All views expressed in the article are the independent opinion of DollarsAndSense.sg.
“I save about 20% of my salary each month. Is this enough?”
“I find it hard to save even 10% each month. With all my expenses, how can I save more?”
“I just save what’s left at the end of the month. What else should I do?”
Since young, we have always been reminded of the importance of saving. As we grow up, we may hear some our friends saying they’re able to save over 50% of their salaries each month or read about how financial bloggers are able to set aside more than $20,000 in savings every year.
After we get our first paycheck, this is a natural question to ask ourselves.
The Problems With Following Benchmarks
A common benchmark some people advocate is the 50/30/20 rule.
According to this rule, you should allocate 50% of your monthly budget towards essential items such as housing, food and transport; 30% towards lifestyle choices; and save or invest the remaining 20%.
Other common rules include setting aside at least 10% of your income each month towards retirement, or just saving as much as you possibly can.
Following these benchmark standards may be useful as it reminds us of the importance of saving. At the same time, these rules should not be overly prescriptive or daunting. That’s because each of us have our unique circumstances that may dictate how much we are able to save.
Here’s an example based on the 50/30/20 rule.
Couple in their 30s. Have two children
- Own a HDB flat
- Combined Monthly Income: $6,000
- Savings (20%): $1,200
- Monthly expenditure after CPF contribution: $3,600
Single in his late 20s
- Stays with his parents
- Monthly Income: $5,000
- Savings (20%): $1,000
- Monthly expenditure after CPF contribution: $3,000
In both scenarios, the individuals are saving 20% of their respective salaries. Yet, based on a quick observation, we can see that while the couple with two children is likely to be financially prudent, the single in the second scenario can save more if he or she chooses to do so.
The point we are trying to stress here is that while rules are useful to some extent, we should not blindly apply them to all circumstances.
Each of us has our own unique financial circumstances and we should evaluate for ourselves how much we can save each month, as compared to simply following popular savings rules that people talk about.
Identifying The Reasons Behind Why We Save
Saving is a means to an end, but not the end itself. When we save, we’re hoping to accomplish something else with our savings. That’s why it’s important to start off by first identifying the reasons why we are building our savings. There are usually two reasons for saving – to buy something you want (your wants) or to save towards securing our financial future (your financial objectives)
Saving To Afford Your Wants
These are things that you really want but require some time to save up for. Such wants could include a dream wedding, home renovations or year-end holidays.
When you save up for a want, you are saving up today with the intention of spending the money in the future.
Saving For Your Financial Objectives
Most financial objectives require us to commit towards saving. They tend to be less urgent but are actually much more important compared to our wants. These include building up an emergency fund for ourselves, saving for our home, buying a second property or retirement planning.
Majority of our financial objectives are areas that we should not be compromising for our wants.
Consider A Bottom-Up Approach Towards How Much You Need To Save Each Month
We all face varying circumstances when it comes to our savings. Some of us have less financial commitments and can choose to save more. Others may only be able to carve a small fraction of our salaries each month due to existing commitments.
Thus, it can work better to consider a bottom-up approach towards determining how much you should be saving each month. Here is a simple 4-step process to decide how much you should be saving.
Step 1: Calculate Your Non-Negotiable Expenses
Work out the sum of all your non-negotiable expenses each month. These would include daily essentials such as food, transport, utilities, telecommunication and any allowance that you are giving your family members. For those who own a home or cars, your mortgage and loan repayments should be included.
Step 2: Determine How Much You Need To Set Aside For Your Financial Objectives
Next, consider your financial objectives. Determine how much you need to set aside each month to achieve them. This should include saving up for your house, your emergency fund and your long-term investments.
Prioritise your financial objectives. For example, if you don’t already have an emergency fund, you should aim towards building it first, before deploying funds to investments.
Step 3: Save For Your Wants
Whether you are planning a short getaway or saving towards your dream wedding, you need to calculate how much these things will cost you, and how you can save towards them.
At this point, you may realise that while your wants are infinite, your budget definitely isn’t. That’s where prioritising comes into play. Would you rather go for an expensive holiday, or have more savings to channel towards your home renovation? Ask yourself what’s more important now and what can wait.
Step 4: Calculate How Much Money You Have Left For Discretionary Spending
Once you have budgeted for your monthly essentials, financial objectives, and your wants, the remaining funds will be discretionary income that you can spend on whatever it is you like. You can choose to allocate more towards your long-term financial objectives, your wants, or on entertainment today.
Example of A Monthly Budget Sheet
You also need to remember that as you grow older, circumstances may change. You may find yourself earning a higher salary but also saddled with more financial commitments.
At the end of the day, while rules for savings may be a good guide to help you get started, they may not necessarily suit our personal circumstances. You need to assess your personal situation to calculate the ideal amount you should be saving each month.
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