how much you should save

This is a guest post by Lyle David Solomon, the principal attorney at Oak View Law Group. Connect with him on LinkedIn or get in touch via Twitter.

Saving money should be one of your top priorities.

In most cases, however, people find it hard to save money. We spend several hours calculating how much money we should be saving. However, when it comes to actually saving money, most of us chicken out. So the question remains, what should be the best way to save money?

Should you take out $50 a month, every month, or should you decide on a percentage? This article will focus on the right percentage of your income that should go to savings and how to begin saving that amount.

putting money in piggy bank

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An Ideal Situation 

If you were to save money, an ideal situation would be to take out around 20% of your total income. Many people argue that this is the most significant factor that contributes to ensuring financial security. This is most commonly known as the 50/30/20 Rule.

50/30/20 Rule 

According to this world famous rule, one has to distribute their salary to allow them to budget earnings and save enough money. The rule suggests you spend 50% of your total income on your bare necessities. That can include your rent, food, and utility bills etc.

Reserve the next 30% for expenditures that are not typically necessities but are essential for living a comfortable life.

This could include dining out every once in a while, shopping, and perhaps something for entertainment. Moving on to the last division, dedicate some money to saving. The rule suggests that you must save 20% of your total income so that you live a life of financial stability. 

If you are stuck with numbers, there are online calculators available to help you distribute your income according to the 50/30/20 rule. To use such calculators, you need to add your gross income after deducting the tax. The calculator will automatically distribute your income into the amount you must spend for all three divisions.

On the surface, this rule looks like the ultimate solution for your financial concerns, but things are not that simple. One of the reasons for that is that this rule is too generic. Life is different for all of us. While some of us might be able to save up to 20% of our savings, there might be people whose living conditions might not allow them to save even a mere 5% of their total income.

In cases like these, the 50/30/20 rule is not helpful. So what other way can help you determine how much money you should save each month?

Ask Yourself These Questions:

#1 Are You Debt Free?

This is arguably the most critical question you need to ask yourself before you draft a budget. Debt is the biggest hindrance to saving money. When you already have to take out a big chunk of your money to pay off your debts, you are hardly left with anything to spend, let alone save. In this case, you can use the following ways to pay off your loans and save money simultaneously.

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  • Consolidate Credit Cards– If you have multiple loans on multiple credit cards, it is best to utilize consolidate credit cards and then pay off the loan with a lesser interest rate and a lower monthly payment. When you consolidate credit cards, you end up merging all your debts into one, so choose a credit card with a lower interest rate. This will help you decrease your interest rate, and in turn, you will be able to save money. Keep an eye out for special deals on bank transfers. If you avail of a special deal to consolidate credit cards, you might end up saving a considerable amount of money. 
  • Consumer Credit Counseling– If you are having difficulties in coming up with a plan for your debts, you can sign up for consumer credit counseling. There are several non-profit organizations that can assist you in this regard. You can take their help for several credit-related things. What’s more, they may even teach you how to consolidate credit cards if you cannot do it independently. 
  • Emergency Funds – Got a little extra cash this month? Well, consider saving it. Saving money in an emergency savings fund is arguably the smartest way to pay off your loans quickly. When you gather enough money in your emergency fund, you will be able to add more money to your monthly loan payment and pay off your loans a lot quicker. Paying off your debts should be high on your priority list. If you do not pay off your loans as soon as possible, you will only pile up more interest and never get to actually saving money. 

#2 What Are Your Basic Necessities?

When coming up with a budget, you need to take a closer look at all your necessities. Even though most people have similar basic necessities, it is possible that what constitutes a necessity for you might be a luxury for someone else. This is why you need to make a list of all your basic necessities and judge whether they are vital at all. If they are a luxury, it is best to avoid spending money on them. 

Having a clear picture of what is absolutely important for you can help you draft a budget that distributes money as per your needs. This way, you won’t have to compromise on your necessities and at the same time avoid overspending.  

#3 What Are You Trying To Achieve?

You may have some financial goals that you want to achieve, and keeping these goals in sight is important to motivate yourself to save money.

Depending on your age, you may have certain goals; for instance, if you are nearing 40, you might start thinking about retiring. Saving money for your retirement might worry you greatly and that can be the biggest motivation. Considering these factors, you must come up with a number you believe is crucial to saving each month to live comfortably after retiring.  

We all have different financial goals, and depending on those goals, we can come up with a budget that allows us to save money comfortably. Ideally, if you have just started earning, you must at least put aside 15% of your income. This is an ideal figure that can contribute greatly to your savings. However, you are the best judge of your situation. If, at present, you are only making enough to get by, save whatever you can- even if it is a tiny amount. Something is always better than nothing.

Do You Need To Increase Your Income Avenues?

More money = More Savings.

It is as simple as that. If you want to achieve your goals urgently and your current income isn’t sufficient, perhaps you need to look for other income options. There are several ways you can start generating a second income. Look into all the options you have and then decide on the one that is the most feasible. 

Saving investment plans are a great option for many. A plan like this allows you to invest a certain amount of your money to get returns.  The return on investment can help you pool in money for your savings account. This might aid you in saving more money every month without taking away a big chunk from your salary. 

The Big Question: How Much Should You Save Every Month?

Now that you have pondered and asked yourself the questions you needed to, it is time you do the calculations and decide how much money you must save every month.

If you have a stable income and a good lifestyle, the 50/30/20 rule may work best for you. However, if you feel that your situation is different and you have to deal with different or difficult circumstances, you must make a plan that helps you save money accordingly. 

Saving money should not be a burden, but rather a habit.

You can never tell what is to come tomorrow and the best way to deal with this unpredictability is to prepare for it. You can use whatever formula, calculators, or theories you want but you must consider your salary and financial goals in mind. This is why you should come up with a plan that keeps your specific needs and goals in focus. 

As a rule of thumb, it is ideal to save anything between 10-20% of your complete income. The one thing that will surely help you save money is to consolidate credit cards. This is a great strategy to pay off your loans and ensure that you pay minimum interest. Hopefully, the information discussed in this piece helps you understand how you can maximize your savings without getting stuck in a loop. 

Lyle David Solomon
Lyle David Solomon

Lyle David Solomon is a licensed attorney in California. He has been affiliated with the law firms in California, Nevada, and Arizona since 1991. As the principal attorney of Oak View Law Group, he gives advice and writes articles to help people solve their debt problems.