Saving money is one of the cornerstones of financial stability, but determining how much of your income to save can often be confusing. The right savings rate depends on several factors, including your financial goals, lifestyle, and income. In this blog, we’ll explore practical guidelines to help you determine how much of your income you should save, as well as unique insights that can make your savings strategy more effective.
One popular starting point for determining how much to save is the 50/30/20 rule. This budgeting guideline suggests dividing your after-tax income as follows:
For most people, saving 20% of their income is a good baseline to start from. It allows for a balanced lifestyle while steadily building up savings. However, your financial goals may require adjustments to this rule.
While the 50/30/20 rule provides a solid foundation, it’s essential to tailor your savings rate to your specific situation. Some factors to consider are:
If you’re saving for a short-term goal like an emergency fund, you might aim to save more aggressively in the short term—perhaps 30-40% of your income—until that goal is met. For long-term goals like retirement, consistency is key, and sticking to 20% can be sufficient as long as you start early.
Higher earners often have more flexibility in their budgets, allowing them to save a larger percentage of their income without sacrificing lifestyle. If you’re in a higher income bracket, consider saving 25-30% or more, as this will give you greater financial freedom in the future.
Conversely, if you have a lower income, saving even 10-15% may be a challenge, but it’s still critical to develop the habit of saving, even if in smaller amounts.
If you’re late in starting your retirement savings, consider increasing your savings rate to 25-30% to catch up. On the other hand, if you’ve been diligently saving and are on track with your retirement fund, you may be able to scale back slightly and allocate more toward other financial goals or lifestyle needs. If you’re nearing retirement age or want to take advantage of tax benefits, then you may want to invest more funds into superannuation.
If you have significant debt, such as student loans or credit card debt, your top priority should be to pay off high-interest debt first. In this case, you might consider reallocating the 20% typically dedicated to savings in the 50/30/20 rule towards debt repayment. This strategy allows you to reduce your debt faster and frees up future income for saving and investing.
For those with a home loan, another effective approach is to direct extra funds into an offset account or make additional loan repayments. An offset account is a transaction account linked to your home loan, and the balance in this account reduces the amount of interest you pay. By lowering the interest owed, you can pay off your mortgage sooner and save money in the long run. Both strategies can significantly reduce your debt burden and enhance your financial security.
Before you focus on long-term savings like retirement, it’s essential to build an emergency fund. This fund should cover 3-6 months of living expenses in case of job loss, medical emergencies, or unexpected expenses.
If you don’t already have an emergency fund, aim to save at least 10-15% of your income until you reach this goal. Once the fund is established, you can then shift your focus to long-term saving and investing.
While saving is crucial for meeting short-term financial needs, investing can help you grow your wealth over the long term. Due to the high rates of inflation, the cash you save today may not be worth as much in the future. By investing, you give your money the potential to grow and outpace inflation, helping you maintain and even increase your purchasing power over time.
Investing also offers the opportunity to generate higher returns compared to a standard savings account, which often provides minimal interest. By investing in assets like stocks, bonds, or real estate, you may be able to build wealth more effectively over the long term. Though the 50/30/20 rule doesn’t explicitly include investments, you can direct part of the 20% savings toward them or increase that portion to cover both. Our financial advisers can help you strike the right balance between saving and investing, ensuring you’re financially secure today while building wealth for your future goals.
One of the most overlooked factors in saving and investing is time. Starting early allows you to take advantage of compound interest. The earlier you start, the less pressure there is to save or invest a larger percentage later in life.
For example, if you start saving or investing 20% of your income in your 20s, the power of compounding will make it easier to reach your retirement goals without needing to dramatically increase your savings rate or investments later. On the flip side, if you delay until your 40s or 50s, you may need to save or invest a much higher percentage of your income to catch up.
Your savings strategy should be flexible and adapt to changes in your life circumstances. Here are a few key milestones that may require you to reassess how much of your income you save:
Automating your savings and investments is one of the simplest ways to ensure consistency and stay on track with your financial goals. By setting up automatic transfers from your paycheck or checking account into your savings and investment accounts, you can eliminate the temptation to spend this elsewhere and guarantee regular contributions toward your financial future.
Additionally, if you’re saving for multiple goals (e.g. emergency fund, retirement, and a home), consider setting up separate accounts for each goal. This will help you track your progress and avoid dipping into funds meant for other purposes.
Determining how much of your income to save is a personal decision influenced by your financial goals, lifestyle, and current circumstances. While the 50/30/20 rule is a good starting point, your savings and investment strategy should be personalised and adapt to changes in your life. If you’re unsure where to begin or need help refining your financial strategy, feel free to contact our expert financial advisors. We offer practical advice and can help you develop a personalised savings and investment plan so you can feel confident about your financial future.
* The information within is general advice only, prepared without taking into account any of your individual objectives, financial situation or needs. Before acting on this advice you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs.