How much should I save each month, and how much should I have saved now, were asked two questions in the last week.
And they came from a young man who had been working full time for 5 years.
He is 30 years old and earns € 30,000 per year.
He wanted to get a fact check on the double digits, and my analysis was that he was behind on one and ahead of the other.
The one he was ahead of was the amount he was saving each month. It was € 500, or 2.16 times more than the minimum I would have recommended him to save, based on his income.
However, he was behind on the amount he had saved so far.
He had € 7,200 in his account but I would have preferred that number to be € 13,847.
So his savings rate was great but his savings balance was low, and he was mainly because it was only in the last 12 months that he started saving € 500 per month. Until then, the amount he saved was very irregular and a few months ago he saved nothing at all.
In a moment, I’ll give you some benchmarks, which you can compare yourself to, but before I do, let me quickly tell you the motivation behind writing this article.
There are some useful numbers and guides you can refer to when it comes to your pension fund and what should be in that particular pot at any given time. But it’s hard to know how much should be in the non-retirement savings pot.
Nowhere did I find a resource that turned out to be useful or that gave numbers, so I decided to create it myself.
And how much you save and how much you should have saved by now are inextricably linked. And I appreciate that the amounts in each case can be very circumstantial and will depend on your age, income, location of residence, lifestyle, existing commitments, etc., so many factors come into play. game and each must be taken into account.
When I started to put these numbers together, I wanted to make the connection to monthly savings and your savings balance, specifically referring to your age and income. I think it would be pointless to do otherwise.
You can’t say bluntly that a 35-year-old man should have $ 10,000 in savings, while a 35-year-old man could earn $ 100,000 each year and another $ 25,000. So I tie savings to income because you just have to, right?
What has turned out to be more difficult is knowing the circumstances of each individual i.e. do they have a mortgage, do they live at home, do they have dependents, what is their level of debt, what is their lifestyle, etc.
Each of these factors influences how much they can save each month, so the numbers I’m going to suggest may be an overestimate or underestimate of what a person or couple can save, but they’re good numbers nonetheless. and more importantly, i believe my method is correct because it is applied in exactly the same way.
The typical reference to how much you should be saving is a% of your income, which is probably the most common method people use, and the benchmark most advisors point to.
However, the method I like, and this is the one I recommend to all of my clients, is based on saving an hour of your income each day.
I use this method mainly for two reasons (a) I have found it to be more effective for people as they understand the logic and it makes more sense to them than just picking a% (b) they take action and follow this advice and want to keep this hour for themselves, not for someone else.
Using this method, people can also compare themselves directly on a like-for-like basis. Someone saving € 1,500 per month, it can represent 35 hours of their income each month, and for someone saving € 150, it can represent 40 hours.
Okay, there are a few caveats I have to tell you about my numbers.
They assume you are working 40 hours a week, they are based on the fact that you started saving at age 25, so when calculating what you should be at age 50 the numbers are based on what you would have saved and accumulated over the past 25 years. , these figures also assume that they are not intended or used for a pension or the purchase of a house or for anything specific, they are based on the number of working days in the year, all amounts accumulated for an emergency fund are included, the hourly savings rate is calculated based on the midpoint between the income ranges, no return on investment has been applied to these numbers, I have not allowed any increase in income over the years, and when determining net monthly income, I have calculated what the average between a single person and a married couple is.
And in the table, (SEE BELOW) I also put in the daily savings rate because sometimes it’s easier to break the monthly amount down into smaller chunks which I think makes saving a lot easier.
Possibility of saving
And I repeat, there are many people who have the opportunity to save much more or much less than an hour of their income each day, but without knowing their exact situation, it is difficult to spell out what their ideal number is in an article like this one, because there are so many variables to consider. It’s an easy math when you’re with them in person though.
What I like about these numbers is that they are good benchmarks and something you can use to compare your existing savings, and good goals as to (a) minimum amount you should save each month and (b) what target you should aim to achieve at different time frames.
And if you’re still in that saving mode which has a specific goal of saving to buy a house that’s fine too, you can start later once those savings have been used up and From that point on, you can determine what your 5-year target is to multiply the recommended monthly savings by 60.
If you’re late where I think you should be, that’s fine, the past is the past, there’s nothing you can do.
The key is to want to move on and make a fresh start. And linking the amount you save to the amount you earn each hour is a great way to establish a logic behind what your monthly savings rate should be and the goals against which you can measure your progress over the 5. Next 10 years from this point. .
Liam Croke is Managing Director of Harmonics Financial Ltd, based in Plassey. He can be contacted at [email protected] or www.harmonics.ie