Are you starting to earn a substantial income and have decided to save some of it? Good for you!
On average, an individual should save 20% of his income. But don’t worry, this answer is not universal. It is according to your income and especially your expenses that you will be able to save and put aside a certain amount every month.
We’ll guide you step by step around the different questions you’ll have to answer to successfully figure out how much you can save every month.
Why should you save every month?
Putting money aside allows you to have precautionary savings, to realize a future project, to prepare your retirement or to have capital to pass on to your heirs.
How much should I save each month?
Save 20% of your income each month. This number comes from the famous 50 30 20 rule: 50% for needs, 30% for wants, 20% for savings.
Saving and putting aside every month: why?
10, 100, 500 or maybe even 1,000 dollars per month? Whatever the amount, before anything else you need to ask yourself the simplest and most complicated question in the world: “why save?”
This is probably a question you think little or nothing about when you decide to put money aside. Ever since you were a child you heard your parents or grandparents tell you over and over again to “save money.”
And you listened to them! Good for you.
Now that you are no longer a child, you should be able (we hope) to understand why you are securing part of your income by saving every month.
Here’s a little help: a quick overview of the main reasons why people decide to save every month.
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Saving monthly to have a precautionary savings
Big unexpected expenses, health problems, loss of your main income… An urgent need for cash can arise at any time and it is best to be prepared.
Having a precautionary budget with a few thousand dollars set aside will never be detrimental to you, on the contrary! Your savings will allow you to cope in case of a hard blow.
It is common to admit that you should have enough to live on for at least 6 months (ideally 1 year) if you ever lose your entire income.
Saving for a future project
Generally, this is a real estate purchase, which is a significant amount of money that you should anticipate several years in advance.
It can also be the purchase of a new car, a big trip, the financing of your children’s studies… There are many reasons in life to have a large sum of money available and you may be happy to have some or all of it set aside.
Saving every month for retirement
It’s no longer a secret that debt repayment is getting heavier every year and that the future of government pension payments is in doubt.
Retired people are finding it harder and harder to support themselves, pensions are low and shrinking over time. Combined with inflation, you can see that saving throughout your life to build up capital at retirement is an option to be seriously considered.
Saving every month to have capital to pass on to your heirs
Children, parents or loved ones who are dear to you, in case of death you inevitably have people you do not want to leave in need.
Saving on a regular basis will allow you to protect these loved ones in the event of a sudden departure.
Inheritances and capital transfers follow specific rules. Find out before you sign up for the first life insurance policy that comes along.
Now that you know the main reasons for monthly savings, let’s look at the different types of savings and investors that exist.
The different types of savings and investors: what is your profile and how much do you need each month?
What are the different types of savings?
Depending on your situation and your projects, you can easily categorize the reason for your savings.
There are generally three types of savings:
- Precautionary savings, to deal with an unforeseen event
- Project savings, to finance a major expense
- Investment savings, to make your savings grow and make them profitable
What are the different types of investors?
You don’t know what type of investor you are? Don’t panic, here are the main types:
The investor with a conservative profile
The major part of his budget is devoted to precaution. He favors the security of his investments with a low exposure to risk, most often via bank passbooks with low interest rates. Consequently, they accept a moderate performance of their savings.
The investor with a balanced profile
He is calibrated on a fair balance between performance and security. The balanced profile wishes a performance of his savings accessible with a risk taking which remains reasonable. He invests in different investments more or less risky (real estate, stock savings plan…)
The investor with a dynamic profile
He is looking for a strong valorization of his capital and he is ready to accept a risk linked to a consequent volatility. Therefore, he favors the riskiest investments: investment in crypto-currencies, construction of a CTO that pays…
Beware, an investor profile is not fixed and unchangeable over time, it can be influenced in large part by your character or your relationship to money, but you can just as easily adopt a “cautious” profile in an investment A and adopt a dynamic profile in an investment B.
Match your savings type with your investor profile!
You must have noticed some similarities between savings types and investor profiles, right?
At first glance, we would tend to put them together like this:
- Investor with a conservative profile -> precautionary savings
- Investor with a balanced profile -> project savings
- Investor with a dynamic profile -> investment savings
Even if this selection makes sense, it can be counter-intuitive if you don’t think it through.
You feel like a Wall Street wolf and are ready to take all the risks to maximize the profitability of your savings. So, you consider yourself as an investor with a dynamic profile.
Very well, but remember the very first question we asked ourselves at the beginning of the article: “why save?” in other words: in the long run, what is the objective?
You had planned to save and put aside 10,000 dollars to build up a deposit for the purchase of your first property.
Investment savings (therefore risky) would probably allow you to reach these 10,000 dollars as quickly as possible…
In the best of worlds.
In a world without risk.
And this world does not exist!
Buying a property is a huge investment with painful consequences if you don’t manage the financial aspect well. Better not to tempt the devil in this kind of situation, right? Stay reasonable and adapt your investor profile to this situation to be sure to complete this project.
And in another case?
Stick to the essence of your project and your objectives! For each project define exactly what it is to make sure you activate the right investor profile in you and select the right type of savings.
Find out how to get rich with no money.
How much can you save based on your income?
Don’t be mistaken, in this question the most important word is not how much but the verb conjugation “can”.
What is interesting to determine is your capacity to save. As you can see, this will depend on several factors.
Calculate your income… but especially your expenses
“To know how much I can put aside I need to know how much I earn.”
It’s true. Your income will determine your ability to save.
But let’s take a look at a basic example.
Corentin, Sylvie, Clément and Jeanne respectively earn a salary of 500, 2,500, 5,000 and 10,000 dollars per month. Granted, their savings horizons will be totally different.
But you only have part of the equation if you only think about the income factor. The second factor is expenses. Although it is listed second, the expense factor is actually the more important of the two!
Corentin spends 300 dollars per month, Sylvie 1,000, Clément 2,000 and Jeanne 9,000. At the end of the day, which of these 4 people will have the best savings capacity?
Corentin : 500 – 300 = 200 dollars
Sylvie : 2 500 – 1 000 = 1 500 dollars
Clément : 5 000 – 2 000 = 3 000 dollars
Jane: 10,000 – 9,000 = 1,000 dollars
By taking into account this second factor, we realize that Jeanne, with her monthly salary of 10 000 dollars is finally only the 3rd on the list with the best saving capacity once we have deducted her expenses from her income.
Expenses and bank card: how to choose between a debit or credit card?
How much to save per month: do the math!
It’s up to you! The first part is easy: determine your income. The second part is a bit more tedious: add up all your outgoings (fixed + variable expenses) to get an idea of your savings capacity.
Here is a list (not exhaustive) of the current expenses and charges that you must deduct from your income:
Housing: rent, mortgage, electricity/gas/water
Subscriptions: telephone and internet
Transportation costs: gas, public transportation
Insurance: home, car, school
Current loans: real estate, car, consumer credit
Taxes: housing, local taxes
Family expenses: food budget, clothing budget, canteen costs
Finally, the most important and variable: vacations and leisure activities!
Check your banking app and write everything down on a blank sheet of paper! Fixed expenses: rent, bank loan, internet, energy bill… And variable expenses: outings, vacations, exceptional expenses… Your account statements will help you not to forget anything.
What is the ideal savings according to your income?
Now that you know how much you can save each month, check if you meet the “traditional standards”.
When we talk about traditional standards, nothing official, but most bank advisors agree on an amount (expressed as a percentage) of your income to put aside through savings.
If your monthly salary is less than 1,000 dollars, you should save 5% of your income.
If your monthly salary is between 1,000 and 1,500 dollars, you must save 10% of your income.
If your monthly salary is between 1,500 and 2,000 dollars, you must save 15% of your income.
If your monthly salary is between 2,000 and 3,000 dollars, you must save 30% of your income.
If your monthly salary is more than 3,000 dollars, you must save 35% of your income.
How about it? Are you close to his recommendations or on the contrary very far away? Do you think it is possible to get closer to them?
Note that we are talking about an ideal savings rate, of course the needs of each person will vary this rate by a few (or many) percentage points.
How to save 20% of your salary each month?
We recommend that you save 20% of your income each month. This number comes from the famous 50 30 20 rule : 50% for your needs (rent, credit, insurance), 30% for your desires (leisure expenses), 20% for your savings (investments in savings books or financial products). This may seem complicated or even unattainable, but you will see by the end of this article that it is actually quite simple.
Saving 20% of your salary: calculation and will
Have the will to save money
This may sound completely absurd but it is the most important element.
The human brain constantly contradicts itself, and your behavior acts accordingly. Make sure that you are in the best position to achieve your goals and succeed in saving money efficiently.
Remind yourself frequently why you are doing this. Why are you spending less? Why aren’t you going to spend a third of your salary at that clothing store? You have a goal and you’re going to stick to it.
If you have the true will to cut back on your spending and increase your ability to save each month, then you’ll easily get there!
Figure out what’s keeping you from saving every month
The second element is to determine what costs you the most, what prevents you from accessing savings. What’s the barrier between you and being able to put money away every month?
You are lucky, if you followed the previous paragraph we recommended you to list all your expenses! From there, you already have a vision on your biggest monthly expenses.
Using a kakebo will help you to list and understand all your expenses easily.
Do you go out to 3 restaurants a month for several hundred dollars? Fine, go only twice next month.
Is your internet bill twice as expensive as your friends’? Cancel it and find a cheaper internet provider.
The goal is to analyze everything: expense after expense. For your fixed and regular expenses, go and see the competition or other players on the market: there are inevitably cheaper elsewhere.
For your variable expenses and your leisure activities: take a few moments to reflect.
Do you really need to spend so much? Are all your outgoings essential and do they make you happy?
From here on, it’s up to you! Only you can analyze and judge your spending to determine how much you can save per month.
It’s all a matter of measurement! Some people will find it very difficult to live serenely by analyzing their expenses to the nearest dollar and trying to optimize all their costs.
Once again, we are all different and subjectivity comes into play in these calculations. Some people find it essential to have regular monthly outings and leisure activities no matter what the cost, while others realize that it is possible to make financial efforts to finally be able to save every month.
Passionate about savings and investment topics. I modestly try to offer you simple, sometimes not so simple, solutions to beat inflation.