How much should you save?
“Good habits are worth being fanatical about.” – John Irving
The question of how much to save is one that I’m asked about on a regular basis. It’s a question that is often approached from a mathematical perspective but, as I’ve learned from my own adventures in finance, sometimes the math makes things more complicated than they need to be. Now, when people ask me how much should you save, my answer is simple: “save as much as you can.”
Related article: Principles of saving money
Save as much as you can
It may sound overly simplistic but the fact is that I’ve worked in financial services for four years and I’ve never yet met someone approaching retirement who is worried that they’ve saved too much. I have met plenty of people though, who wish that they could turn back the clock five, 10, or 20 years and save a little (or a lot) more.
The reality is that every person’s financial situation is unique; we all have different goals, different circumstances and different levels of motivation. The beauty of the save as much as you can philosophy is that it really is a “one size fits all” solution; you just need to figure out how best to apply it to your own situation. Answering these three questions should help:
1. How much could you save?
Take your total monthly income and subtract your total monthly spending (exclude any expenses from the total that aren’t absolutely necessary). The result is the absolute maximum you could save on a monthly basis.
Related article: Know how much you spend
2. How much could you comfortably save?
Saving can be tricky to do. Saving at the expense of having fun is especially hard to do. When it comes to determining your own personal saving amount, it’s important to choose a number that leaves room in your budget for some fun as well as unexpected expenses. Saving at your maximum savings rate can feel very restrictive and that is likely to backfire sooner rather than later. Choosing a savings goal that is realistic and attainable increases the likelihood that you’ll achieve it and, at the end of the day, your ultimate goal is to ensure that you set your savings rate at a level that’s sustainable over time so it’s important to get the number right.
3. Where’s your “pain point”?
When it comes to setting a savings rate, your goal should be to find a number that hurts a little but not too much; if you choose a number that doesn’t hurt, you’ve set your bar too low. Ask yourself, “If my paycheque was $25 less would I notice?” “If it was $50 less would I notice?” “If it was $75, $100, $150, $200 less would I notice?” At some point, you’re going to come up with a number that makes your stomach clench a little. That’s your pain point.
Related article: The power of the pain point
If the idea of your paycheque being $150 less makes you nervous, set your savings rate at $125. If $50 makes you uncomfortable, set it at $35. The idea is to pick a number that you’ll notice for the first couple of paycheques but that you can adapt to overtime. If the number you choose is too high, you’ll lower it but if you choose a number that’s too low, chances are you won’t go out of your way to increase it.
Once you have your number you can decide whether setting up automatic deductions from your bank account or taking advantage of payroll deductions is the best way for you to save. As I said earlier, everyone’s situation is different and so everyone’s number will be different but the thing that matters more than the number is making that commitment to save. You may think that boosting your current savings rate by a few dollars won’t make much of a difference but I’ll show you in next week’s post how a few dollars can become hundreds or thousands of dollars over time. Too often we get so caught up in trying to figure out how much we should save and where we should save that we lose sight of the fact that what is really important is to take action and actually start saving. First, build the habit, then refine the process. There will never be a better time to start than right now.