Your saving rate is the largest factor in creating financial security, but what amount should you save each month?
The popular 50/30/20 rule recommends that you should keep 50 per cent of your budget for food and rent, 30 per cent for discretionary spending, and 20 per cent or more for savings.
If withholding 20 per cent of your income feels impossible, you shouldn’t be frustrated. Saving a little beats saving nothing.
Where should I save?
Online savings accounts are a good way to begin saving. Some of the best rates are online.
Why save 20 per cent?
Assuming that you are in your 20s or 30s and earn an investment return of around five per cent a year, you will need to save approximately 20 per cent of your income to set your cap at financial independence by the time you retire. The Money Advice Service has an excellent savings goal calculator.
What are you saving for?
True financial independence means sustaining your preferred lifestyle totally out of your investments’ interest and dividends.
The common four per cent rule states that in theory you could take out four per cent of your principal balance each year and live on it indefinitely; therefore, you will need to save 25 times your yearly expenses to become financially independent.
To make things simple, we will base the amount you should save on your gross (before tax) income rather than your expenses.
How long will it take?
By saving 20 per cent of your income, you will hit 25 times your yearly income in just over 40 years; therefore, a 30-year-old who begins saving today will meet this goal by the age of 71.
The lower your expenses, the sooner you will achieve your savings goal.
Investing can help you to begin saving in the long term. First you need to consider your goals and tolerance of risk; next, speak to a financial adviser, who may use software for financial advisers and know that software for financial advisers can be found at Intelliflo and other providers.
Retirement experts comment that the usual recommendation of 15 per cent of income is too low to ensure a comfortable retirement; instead, 25 or 30 per cent is safer.