The importance of saving is one of the key tenets of personal finance. Putting money aside today for usage later is a necessary step in achieving any long-term goals. On the other hand, spending every last bit of your paycheck is a recipe for poor finances now and into the future. Still, everyone’s finances are different, as both salaries and obligations come in a wide range of shapes and sizes. So, how much should you save from every paycheck?
While it is true that your individual financial situation is unique, there are some universal principles that can help guide your spending and saving decisions. Here are three steps to help you determine the amount of your income which should go towards needs, wants, and savings.
Step One: Create a Budget
Before you can decide how much to save withe every paycheck, you should take a full accounting of your finances. A budget will allow you to do just that.
Almost every financial advisor sings the praises of creating a budget, and for good reason. Breaking down your income and expenses should be the centerpiece of any money-related decision, as it will help you to understand in clear and explicit terms the state of your finances.
A budget will enable you to view how much you are bringing in, how much you are spending, and the delta between the two. Of course, the greater the difference between your income and your expenses, the more flexibility you will have to save, invest, and spend.
There are a number of different types of budgeting techniques, with the 50-30-20 rule among the more popular ones. Regardless of which type of budget you decide to utilize, the most important criteria to consider is whether or not you will be able to stick with it. Similar to diets and exercise regimens, a budgeting system is only effective if you are able to abide by it.
One of the biggest benefits of having a budget is that it will help you to understand places in your life where you can decrease your consumption and discretionary spending. That is where the next step comes in.
Step Two: Make Choices
If a budget is a roadmap to your preferred financial destination, saving money is a required part of the journey. It can only happen if you start making choices that align with your long-term goals.
There are certain monthly expenses which cannot be avoided, such as housing, food, and other necessary purchases such as insurance. While there are ways to save on these costs (i.e. finding a roommate), for many of us a good chunk of our income will be devoted to the essentials.
Assuming that 50% of your paycheck is going towards these needs, that still leaves plenty of room for choices that can increase the amount we have to save. Cutting down on food purchased outside the home–or at the local coffee shop–is a prime example where your daily decisions can quickly add up into major savings.
Of course, it can be difficult to forgo an opportunity to go on an adventure with your social group or miss seeing your favorite artist in concert. FOMO is a powerful force, one that can definitely mess with your plans (and savings).
Staking out your long-term goals and sharing it with your friends and larger social network (a relatively recent fad known “loud budgeting“) might help you to stay disciplined. Making decisions to cut down on consumption and sticking with them will help you to save money, regardless of whether you shout your intentions from a mountaintop or keep them quietly to yourself.
Step Three: Monitor Your Progress
While plans are important, life has a funny way of messing with even the best of intentions. Monitoring your progress can help you to understand if your savings goals are indeed realistic.
As you embark upon your savings journey, you may discover that cutting down on certain items is simply too hard. However, there is a decent chance that you may also find that there are other purchases that are much easier for you to leave behind.
There could also be unexpected, one-time costs which catch you by surprise. Hopefully, you have an emergency fund at the ready to prevent you from dipping into your savings, but if not these potholes on the road of life will also impact your bottom line.
Allow yourself the flexibility to figure out the best path forward, making adjustments along the way. As time passes you may find that your salary has grown, giving you additional leeway to send more funds to your savings accounts.
Keeping your eyes on your spending through regular reviews can allow you to gain insights into your progress. This will help you to make any changes to support your spending decisions and savings goals.
Conclusion: Save As Much As You Can
At the end of the day, it is best to save as much money as you can for your future use. As much as we try to break personal finance down to the black-and-white numbers, it has much more to do with our priorities and preferences.
Some individuals would prefer to live the most spartan of existences today in support of their future aspirations. Others elect to place their spending on the more enjoyable side of the ledger in the present day.
The constant balancing act between our present and future finances is really the crux of the matter. While you do not want to suffer now, the more you can squirrel away for the years to come the better your future situation will be.
So, how much should you save with every paycheck? While there is no hard and fast number that will work for everyone, creating a budget, making decisions, and monitoring your progress will help you to determine the amount that is right for you.
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