People always wonder how much money they should be saving. Are they saving enough? Too much? Savings are important, and online financial planning software can help show you if you’re on the right track or not can help you achieve both your short-term and long-term financial goals.
Of course, there is no magic number to answer this question. However, in broad strokes we can look at your age and make an estimation of what will put you in a good spot on two separate but equal fronts:
- Retirement savings is the money you save to carry you through your life after you retire and either stop earning, or earn significantly less.
- Emergency savings are money you tuck away in case you lose your job and need to cover expenses; or for an unforeseen medical or legal situation. It is important to have a safety net just in case.
In Your 20’s
Your early years are typically lean years. You’re fresh out of University, perhaps working your first real job. This is a time when people most often struggle to save their money as they look to establish themselves in the workplace.
When possible, setting aside 10% of your gross income is recommended. This will allow you to continue earning while setting aside a small amount of money for your retirement. In addition, having around 3 months-worth of emergency living expenses is also suggested.
Three months may not sound like much. However, at this stage in your career it is often far easier to switch or find a new job more quickly.
In Your 30’s
At this point in your career, you can expect to reach your peak spending potential, though your earnings haven’t peaked yet. Still, it is during this decade that major purchases are made such as property or vehicles.
Setting aside about 12.5% of your gross income allows you to increase the percentage, without going overboard from the 10% you were just saving. The percent increase isn’t large, however at this point in your career you are also earning more so while the percent hasn’t gone up much, the actual amounts have.
An emergency savings of between 3-6 months is also recommended during this time. Your expenses have gone up, so a larger buffer is helpful.
In Your 40’s
At this stage in your career, your earnings will begin to peak and 15% of your gross income should be directed towards retirement savings. Your earning potential will be the greatest, and your salary is much higher than it was in previous decades.
There may be some larger expenses during this time, however you’re also older and wiser about your finances than you were in your younger and more reckless years.
Set aside 6-12 months-worth of emergency expenses. Keep in mind that at this stage, your expenses are increased as you may also have a spouse and family to look after in addition to financial obligations such as home, vehicle, or insurance.
In Your 50’s
At this point in your career, you are still earning a good salary, but your expenses will begin to level off and may in fact decrease. Homes and vehicles will start to be paid off and you are able to save 20% of your gross income for retirement.
Your emergency savings should be substantial by this point, and you should be prepared to set aside 12-24 months-worth of expenses. At this stage, losing your job or being faced with a catastrophe is typically more difficult to overcome. Being well-prepared is key.
In Your 60’s
If you’ve done the above, then by this point you should be able to stop saving and enjoy. Retirement is fast approaching and there may be payouts coming your way from your career in addition to your personal savings.
Where to Save
Emergency savings are still important to have once you retire, though at this point they should be in safe investments that are high-yield, safe, and liquid. Online financial planning tools such as PictureWealth can help you determine how much to save and how you are tracking towards your savings goals. One great option Is to put your savings in an online savings account with your bank or a term deposit.
Online savings account and term deposits are safe, and will earn a higher percentage of interest than a regular savings or checking account. The catch is that these accounts sometimes require a high minimum balance to be maintained or minimal transactions to occur in order to get the full benefit from the accounts. However, as this is an emergency fund you shouldn’t be touching it anyway!
How Strict Are These Numbers?
The numbers above should be viewed as a guideline, and not set in stone. In general, you earn more as you age and can save more as you get older. However, you typically will have more financial and personal obligations as you age such as a home payment or family.
When in doubt, save as much as you can without putting yourself into financial hardship. More is always better, especially where emergency savings are concerned. However, there’s no point in trading one financial headache for another.
If that means saving 8% in your 20’s rather than 10% so be it. The important thing is starting on a path towards financial freedom and security. When you can picture your financial future, it becomes easier to improve and prepare for.
This information is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.