Most people realize they need to save to reach their financial goals.
The question is, how much should you save? Regrettably, there isn’t a straightforward answer.
Your savings rate depends on your personal goals and your age.
However, it would be best to consider what you want to achieve within the coming year, the next decade, and your lifetime.
The 50 30 20 Rule
The 50 30 20 rule is attributed to Elizabeth Warren from her book Your Worth: The Ultimate Lifetime Money Plan.
This budgeting method suggests you allot 50% of your income to essential living expenses such as your rent or mortgage payment, utilities, groceries, and transportation costs.
A further 30% of your income should be allotted to your wants.
These are lifestyle choices such as dining out, visiting the gym, attending concerts and movies, etc.
The final 20% of your income should go towards debt repayment and savings.
Saving and Investing: Thinking Long Term
Putting money in a savings account may not be your best option when it comes to your long-term goals.
The returns are very low on savings accounts compared to other investment options.
For example, according to the Rule of 72, a stock offering a 6 percent return would take 12 years to double in value (72/6=12).
A high-interest savings account offering a 2 percent return would take 36.5 years (72/2=36.5).
This is not only due to the higher rate but also compound interest.
Compound interest is when interest accumulates on your original investment and your investment earnings.
This creates a snowball effect that accelerates your savings.
Here’s an example based on a $5,000 investment at 6 percent.
After five years, your savings would be $6,744.25.
After 10 years, $9,096.98.
After 25 years, $22,324.86.
You can use this calculator to see how much impact it could have on savings.
Compound growth and time in the market work together as a team.
The more time your investable assets are allowed to grow, the more potential compound interest has to increase your investments’ value.
This means when you start to save early, you don’t have to put away as much money each month.
Your money has more time to earn more compound interest, which is a great advantage when you’re saving for a long-term goal such as retirement.
The push for financial independence before age 65 is powerful today.
For instance, followers of the F.I.R.E. movement (Financial Independence Retire Early) save aggressively and invest early in hopes of creating a life that isn’t dependent on a full-time job or government pensions.
However, this is just one option available to those who want to save for the long term.
Stocks, exchange-traded funds, index-linked deposits, guaranteed investment certificates, and registered savings vehicles can be used to accumulate wealth.
Registered accounts have the added bonus of a tax exemption, deferral, or deduction.
Examples include registered retirement savings plans and tax-free savings accounts.
Many long-term investment options mentioned above can be held within these accounts.
Nonetheless, some investments are complicated, sometimes risky, and may include exorbitant fees.
Do your research before you invest.
3 Strategies to Meet Your Savings Goals
Saving may seem impossible, but you can achieve your goals by following specific strategies.
These are just three that can help you reach your goals.
1. Create a Budget and Save Consistently
Should you have extra money after you’re paid, but it just slowly dwindles away? Do you understand how you spend your money?
Unless you sit down and figure out where your money goes, you can’t realistically expect to save.
You can achieve this through a free budgeting app like Mint or Wally.
Most people don’t realize how much they’re spending on certain items or consider them necessary when they’re not.
If you’re spending more than you’re earning, you will need to cut back on any extras if you want to save.
Once you have a clear picture of your expenditures, you can set a realistic monthly savings amount.
It doesn’t have to be a lot, but you do need to stick to your budget and save consistently.
2. Automate Savings
Undoubtedly, one of the simplest ways to save consistently is through automation.
If you don’t see the money, you are less likely to spend it.
Set up an automatic transfer to a savings or investment account through your financial institution.
You can change or stop the transfer at any time, and some banks offer incentives if you use their program.
3. Avoid Debt
Credit is necessary, but you have to handle it well.
Interest charges and debt payments can erode your finances, making it impossible to save.
A few simple strategies can help you manage debt properly.
First, ensure you’re only spending on credit cards what you can pay off in full each month.
Otherwise, you will the likes of 19.99% in annual interest which is steep.
Second, if you’re already swimming in debt, seek help from a credit counsellor.
They can help you address your issues so you can get back on track.
Frequently Asked Questions
- Should you save money while paying off debt?
If you are in your twenties or thirties and have an emergency fund, but are paying off high-interest debts, focus on these debts first. However, when your debt is through a low-interest loan or line of credit, you should save for your long-term goals. Consider contributing to a Registered Retirement Savings Plan or a Tax-Free Savings Account.
If you are older, you need to prioritize savings. Otherwise, you won’t maximize your tax-free investment growth for retirement.
- How much does the average Canadian have in savings?
According to Statistics Canada, the average household savings rate was 11% of income in the third quarter of 2021. However, before the pandemic, the average Canadian saving rate was 7.61%, with younger people usually saving much less.