How Much Should You Save?
Posted by Gail | Filed under Saving
The winner of last week’s prize of The Money Tree Myth is Tammy-Lyn. Drop me an email at getgvo@gmail.com with your address and I’ll post your book off to you. This week’s prize for sending in your “I Need Ideas” post is a Moonjar gift. It will be awarded by random draw from the entries received between Monday and Friday this week for the Success Posts.
Very often I get letters asking me how much a body should save. Of late, there have been changes in the financial landscape – a move from consumerism to frugality – which has new amounts being banded about. Some Spurts are still saying, “Save 10%.” Others have upped the ante to 15% or even 20%. Considering we’ve done a bang up job of saving next to nothing thus far, I find the whole movement to Super Saving very interesting.
We’ve been spending more money than we make for years. This push to save whopping amounts of our income seems unrealistic and doomed to failure. According to the Stats Man, in the 4th quarter of 2008, we saved 4.7%, up 2.8% from the previous year, which had our savings rate at under 2% in 2007. And we know there are still lots of people who are saving squat. The $34.1 billion in RRSP contributions in 2007 represented about 6% of the total room available, leaving 94% of contribution room unused by potential savers!
While saving 10% is a great goal, it is also just a guideline. Each person has to decide how much they want to save for themselves. If you have a whopper of a pension plan at work, saving 10% above that may seem like too much to you. If you have five kids you need to put through college, 10% to cover all that plus retirement and emergencies simply won’t cut it.
The amount of your income you need to save will depend on that income, your age, how much you’ve already set aside, and how much you’ll earn in the future. Equally important is how much you’re willing to give up today to have a big fat savings account in the future.
What is important is that you are saving. Even if you start with just $50 or $100 a month, that money is money you’ll have later when you need it. And you will need it since crap happens, people retire, and food and a roof are essential expenses that don’t come cheap.
Getting in the Savings Habits means setting some goals for what you want to achieve. Setting milestones that are achievable is important if you want to feel successful. So perhaps you’ll start with something like this:
I want to have $500 saved in the next three months for an emergency. I also want to build retirement savings and I’m going to start with $50 a month for each.
Y’all know I think an emergency is all that stands between most people and misery, so getting started – even with a small goal – is the key to making the emergency fund a reality. Once you’ve achieved your $500 goal, you can set a new goal ($2,000 by the end of the year) to work towards. Ultimately you should have six months’ worth of living expenses as your final goal for your emergency fund. To ensure this money will be there when you need it, have it auto debited from your transaction account to a high-interest savings account.
Speaking of automating your savings, that’s also the key to building a retirement nest egg. Begin by saving what you can – like that $50 a month – and then slowly increase the amount as you go. Look for places to trim your expenses and move that money into your savings pool. The next time you get a raise, stash half the extra in savings every month and watch your pool grow. If you want to have an idea of how much you need to be setting aside each month to achieve a specific retirement goal, there are heaps of tools on the web that will help you do just that. Just search for “retirement savings calculator” in google and watch the links pop up. I particularly like the calculators at fiscalagents.com.
Once you’ve got your emergency fund and retirement savings under way, there will be other things you want to accumulate money for like a downpayment, a vacation, kids’ educations, or a new car. Set a goal and milestones for each savings pool you want to establish, and then make the savings automatic.
All the debate about how much you should save is moot in light of the reality that people just aren’t doing it. Raising the bar seems a mite premature to me. Besides, life is expensive. Savings can’t be the thing you do to such an extreme that you have no fun while you’re getting to the next place in your life. If you’ve made some past mistakes and need to clean those up, you had your fun. But if you’re on the straight and narrow, do what you can to have some money for the future — it’s really important — but have a life too.
August 24, 2009 at 9:30 am
This is the first year that I finally set up a savings account where money gets automatically deducted. I’m fortunate that I can put aside 15%. I’m using a TFSA… I love it!! It feels so good to have that money going in there every month. I’m finally making money off of my own money! I have an RESP going for my child and this year I’m finally also re-starting an RRSP. The only way I have been able to do this is because I finally paid off all my debts and the money that was going to pay them is now going towards my own goals. Never again will I be a slave to debt or the credit card companies! Thanks so much Gail. I really wish I could have made it to the picnic this year to give you a hug in person. I’m so thankful for all the free advice you post. *Hugs*
August 24, 2009 at 10:33 am
A great post, thanks Gail!
I agree, that really, people just need to start saving – never mind how much, just get in the habit of doing it.
I personally stash about 25% of my pay away, that said, some of that ’saving’ is actually planned spending. I have a house down payment fund, an emergency fund, a Christmas fund, and my RRSPs. Each account get’s $50/bi-weekly except for the house-fund which gets $150/week (my partner and I rotate).
August 24, 2009 at 10:48 am
I’ve just read through this morning questions, the one about priorities was great!! The person’s situation very closely mirrored mine. I’m going to take some of that advise (with regards to how much I should be saving) and work it into my budget.
Thanks!!
August 24, 2009 at 12:10 pm
I think this is a great post, Gail, but I think there may be a bit of an implied assumption that one has to spend money to have rich / happy / fulfilling experiences. I don’t know that to be true. Also, a lot of joy comes from leaving beneath one’s means and not having any stress at all relating to finances. Two cents from me this lovely, sunny day
August 24, 2009 at 4:35 pm
I’m struggling these days with being realistic about what we can afford to save without sacrificing in the area of debt repayment. This post was just what I needed! I’m feeling a lot better now, knowing that it’s okay to start small (so long as you start!) and then to grow your savings more quickly once you can afford it.
August 24, 2009 at 6:56 pm
I started a savings account last month! $50 was my initial deposit and I am happy to say that I have been putting 10% from our pay cheques into it since. Yes, a small start is good and is much better than nothing. Next is to open an RRSP account to start an automatic deposit into that every month. My nephew and his wife have gotten hooked on your show (I told them to watch you!) and use jars! Her comment to me the other day was…we are using jars and it’s AMAZING how much money we have left over so we can pay down our debt! I am so proud of them! And me too as the savings thing was the last thing for me to get a handle on! It’s all coming together, thanks to you Gail!
August 24, 2009 at 7:28 pm
Your post is nicely balanced… thank you again for your common sense advice!
August 24, 2009 at 11:19 pm
One question that I have had is how this “10%” should be divided up – how much for an EF, how much for retirement savings, how much for planned spending, etc. This post actually helps answer my question, thanks!
August 24, 2009 at 11:38 pm
Saver Queen:
I do not put the 10% in the EF. The EF is unspecified planned spending. The 10% is retirement money that you do not touch until then.
August 25, 2009 at 12:35 am
Saver Queen: when I look at Gail’s interactive web budget, the savings category (10% of your budget) includes both Emergency Funds and (Retirement?) Savings. Gail doesn’t specify how much of 10% goes in either category. I suppose it will depend on each person’s or each family’s situation.
Planned Spending IMHO is above and beyond the 10% savings guideline. I guess planned spending gets worked into the various existing budget categories: like Vacation, Entertainment (for that huge tv or concert tickets), or clothes (like back to school outfits). You may have to add categories for other planned spending items like a house down payment or a new (or new to you) car.
Hope that helps! Congrats to everyone who takes that first step to START saving! Woohoo!
August 25, 2009 at 9:59 am
My husband is still on lay-off. Thus far, one month has turned into three. Three glorious summer months of dinners ready and dishes done and kids transported and household chores completed…but i digress.
We have had plenty of time to put pen to paper and reconfigure our savings needs. We’ve decided that after he goes back to work we will start saving my entire part-time wage in addition to already budgeted monies. We are no longer comfortable with our present education, emergency and retirement savings. We own a home which needs maintenance and would like to do some more touring with the kids before they leave the nest. Since we have never factored this newly acquired income into our budget we will save it rather than ‘upgrade’ with it. In light of EI benefits, saving is much sexier than the latest design trend… I will likely work at this job until we are comfortable…translated, until two rounds of university are completed. No percentage, just as much cash as we can afford without contorting the budget into something ugly!!!
August 25, 2009 at 12:27 pm
Until we were forced to get really real about our debts and financial stupidity (and that is the only word to describe it) we never saved anything and lived way, way beyond our means. And it honestly never made us happy. We depended on our credit cards, lines of credit and the bank of Mom and Pop to be our emergency fund. We made no effort to enhance our pension funds because pension time seemed so far away. Doesn’t time fly?
When the caca finally hit the fan we went nuts paying off our debt and got caught with an emergency (and still no funds) just as we finished paying everything off so we ended up back in debt. After this we started with 10% savings to build an emergency fund and start putting some retirement backup funds aside. We were lucky for a while and built up about 3 months worth of emergency backup but emergencies just keep showing up – and they seem to be herd animals that breed like bunnies.
What we have now learned is that you have to keep building that emergency fund and that it has to be separate from your retirement plans. You can never be too prepared for emergencies or just the odd things that happen in life.
Gail’s budget calls for 10% for savings and 15% for debt repayment. Once the debt is gone your whole way of life changes. We now put 10% aside for emergencies. The emergency fund is divided into two parts – monthly backup and real emergencies. Once we have a years worth of monthly expenses set aside we will just keep building the real emergency fund.
From the 15% set aside for debt repayment we now put 10% into retirement. We have a lot of catching up to do. We put the remaining 5% into planned spending. We don’t have any weddings or education left to plan for so this is mostly a fun and stuff account now.
Altogether we are saving 25% and I honestly feel that this is not an outrageous amount. Just wish we had had the sense to live within our means and save this amount right from the beginning. I shudder to think how much we paid, threw, gave and pissed away in interest over 25 years.
My advice (if asked) to young people would be to pay off your debts and get some savings as fast as possible by starting out living 25% below your means – your expenses should not be more than 75% of your net income. Do the math before you commit to new cars, furniture, houses, vacations etc. If you have to work a second job for a while and do without some of the perks it will really be worth it in the end. It may seem like a lot to be socking away when you want to get out and live life but you would be amazed at how easily you adjust to living smaller and how happy it makes you to see your security net getting bigger and bigger. Having money in the bank, no debts and cash to pay for whatever you chose to buy or do is real freedom. A trip on a cruise ship floated on a credit card is an invisible anchor that will drag you under. Maybe not this year but give it time. Debts also tend to herd together and breed like bunnies.
August 27, 2009 at 12:21 pm
I went from being Scarlette O’Hara – “I’ll think about that tomorrow” to thinking about our debt every second of every minute of every day. My anxiety level and my blood pressure just kept climbing until I thought I would have a stroke. I did find a way to calm down – eventually.
We started paying our debts before we knew about Gail and we went completely overboard. We didn’t have a life and we didn’t have an emergency fund. We did pay down most of the debt but it was hard and miserable. Then we found ‘Til Debt.
The first month we used the jar system we spent every penny from all the jars. The second month we cut all the jars back because we figured that we had over filled them and that we could do with less and put that extra money towards our debt. Well, of course we used it all and even ran short. The third month we went back to the original amounts and used it all. Towards the end of the month we ended up having to use the last of our grocery money to help pay for a prescription because the “other” jar. was empty. We were lucky because we could just eat at my Mom’s. All this to-ing and fro-ing and going back to the stealing from Peter to pay Paul just made me a twitchy mess.
For the fourth month we created a new jar that we called the “transfer” jar. We put $20 into it. The transfer fund was money that was to be used when we ran short in any of the other jars – could be transferred where ever it was needed. Just having that little security blanket lessened my anxiety considerably.
As we got better and better at controlling our spending we started to have money left over in nearly all the jars, nearly every month. Our first instinct was to pay this extra money onto our debts but then we decided to set up a second set of jars. We put the left over money into these jars and within about a year we had a whole months worth of money already sitting there. We also started to put some of the extra funds we earned – overtime, tax refunds, income from garage sales, birthday and Christmas cash gifts – into our chequing account and within two years we had a whole months worth of fixed expenses saved up. This was the single most effective way of calming my anxiety that I have found.
We were no longer living pay to pay but were actually ahead of the game. Now at the beginning of every month all the money that we need for our fixed expenses and for the jars is already sitting there. The money we earn during this month is actually for next month. This makes it completely easy to plan ahead and not get surprised. I am never anxious now because just as soon as the bills come in they get paid because the money is already there. Truthfully – and I know that Gail would not approve – but if I had to do it over again I would actually use borrowed money to set us up with this “month of expenses already in the bank” system. I would rather pay the extra interest than live through the anxiety again. But of course you have to be completely disciplined otherwise this wouldn’t be a tool to help you get straightened out but just another silly mistake and stupid debt.
August 27, 2009 at 12:24 pm
Whoops sorry I filed this under the wrong blog.
September 4, 2009 at 10:03 am
Always have 6 months’ expenses saved up. Take your budget and multiply by 6.
Use the tax free savings account to stash it away. The withdrawal characteristics of the account will prevent you from touching that money prematurely (i.e. you have to jump hoops to withdraw, and jump hoops to put stuff back in).
And… use that in a real emergency and not for something that is a ‘want’.
September 4, 2009 at 10:07 am
We save approximately 30% of our gross earnings. When the mortgage is paid off (i.e. hopefully within the decade), we’ll increase the savings rate to close to 35-40%. It’s a target, but we’ll see.
The only debt we have is a mortgage, but we have ratcheted up payments on it because we want to retire the debt as fast as we can.