Saving money for your financial goals is important. But how much money should you be saving each month?
The traditional rule of thumb is to follow the 50/30/20 budget. In that case, you would spend 50% of your budget on needs, 30% of your budget on wants, and 20% of your budget on savings and debt repayment. But on the path to FI, many recommend saving at least 50% of your budget.
So what percentage will work best for your life? Let’s find out!
Think about your financial goals
Before you decide how much you want to save each month, you should consider your financial goals. Not only should you consider your long-term financial goal, but also short-term goals. Luckily, there are no right or wrong goals. But it is important to map out your personal money goals. Here’s a closer look at a few examples:
Long term financial goals
One great example of a long term goal is reaching financial independence. Many of us on the path to FI have big plans to reach ‘our number’ and retire into more fulfilling pursuits. But reaching that goal will require many years of diligent saving.
Another good example of a long-term financial goal is saving to buy a property. If you plan to put down a significant down payment, then it may take years of saving to reach your goal.
Any long term financial goal that you have will likely take several years, or even decades to accomplish. With that, it is important to stick to your savings plan. Otherwise, you might not make as much progress as you’d like towards your goals.
Short term financial goals
Short-term financial goals are purchases that you can save for within a few months or a few years. A few examples include your well-deserved vacation or upcoming car purchase.
Although your short-term goals will likely fit into the bigger picture of your long-term goals, it is important to save for these goals separately. Without clear savings designations for each type of goal, you might accidentally spend your long term savings on a short-term purchase.
Consider your financial obligations
After you’ve thought through your financial goals, it is time to look at your current obligations. The most common financial obligation is any current outstanding debt. The debts you have to repay will affect your ability to save.
Other types of financial obligations include the need to provide for your family. For example, you will need to keep a roof over your head and food on the table while you work towards your savings goals. Additionally, you may need to consider any childcare expenses that are a part of your life. Although there are ways to optimize your essential expenses, there is only so much that you can economize. Consider these expenses as a part of your current obligations as you map out your savings goals.
How much should you save a month?
Although it can be tempting to decide on a very lofty monthly savings goal, that is not always realistic. Once you’ve taken a closer look at your financial goals and considered your current obligations, then you’ll be in a better position to decide how much you can save in a month. But there are two ways that you can go about making this decision.
In the first strategy, you find a way to make your lofty savings goals a reality. You can take the approach of mapping out your savings goals based on your financial plans. For example, let’s say you have a plan to reach FI in 15 years and need to save $3,000 each month to reach that goal. But in this scenario, you only have an income of $5,000 and monthly financial obligations of $3,000. With that, you would be $1,000 short of your savings goals after meeting your financial obligations. You could decide to increase your income through a side hustle or find a way to reduce your financial obligations. But this strategy will require more sacrifices.
The second approach is to map out your financial goals based on what you are able to save in your current situation. The base amount that you’ll be able to save is the difference between your income and your current expenses. So, if you have an income of $5,000 per month and expense of $3,000 then you’d be able to save $2,000. You can set up your long term and short term financial goals to fit within that savings strategy.
Luckily, there is not a right or wrong way to make this decision. Plus, it is likely that your monthly savings goals will shift over time. You may choose to pursue income boosting opportunities now to supercharge your savings. But in a few years, you might decide to slow down your savings in order to enjoy more free time. The amount you save per month should strike a balance between your long term dreams and current financial obligations.
The bottom line
Saving is a very personal choice. The amount you save should help you reach your goals. But remember to enjoy the life you have now– don’t cut out all of the ‘fun’ expenses simply to meet a savings goal.
As you continue to build your financial foundation, make sure to find a balance between today’s fun and tomorrow’s dreams. Although it is very important to save for the future, you shouldn’t completely sacrifice your quality of life today. Take some time to weigh your financial goals against your current financial obligations before moving forward.