The importance of saving money is clear, but what determines how much of my salary I should save monthly?
Recruitment website, Jobberman believes that the golden rule is that by age 30, the money you have saved should correspond to your annual salary. This gives you a very clear picture of how much you need to save. For instance, if you earn ₦180,000 monthly, by the time you are 30, you should have ₦ 2.1 million at the bare minimum.
This figure should include the money you have in your savings account as well as the money you have invested in business opportunities such as Forex, money market instruments, and the stock exchange.
On paper, it sounds good, but how achievable is it?
Things to consider before you start saving
Before you decide how much of your salary you should save monthly, you need to familiarise yourself with the workings of saving money.
Everyone seems to be in the race for financial freedom, even though saving money is not as cut and dried as many think it is.
While you save monthly, these are some of the things you need to have at the back of your mind;
Saving for emergencies takes first priority
The first savings assignment for your money should be an emergency fund.
Emergencies happen, and they can be pretty pricey. That’s why personal finance professionals recommend establishing an emergency fund that could cover three to six months of living expenses.
Monitoring your monthly income and expenses is important
Setting an emergency savings goal based on the difference between your income and expenses. Putting your emergency savings in an accessible place, such as a savings account at a bank or credit union. Keeping your emergency fund separate from other bank accounts. Automatically transferring money from your bank accounts to your emergency fund
Cut your current spending
If you are serious about setting aside a sizable portion of your salary, you need to cut out things you don’t need.
To make this easier, split your accounts into different categories: Monthly expenses and savings.
You are never too young to save monthly. Yes, you may be caught up in a certain lifestyle that suits your age, but have it in mind that nothing beats financial freedom.
It is easier to save more if you start early. If you start saving by 20 then you will have at least 10 years’ worth of savings by the time you are 30 as opposed to starting at 27.
Generate another source of income
A quick way to save more is by creating another source of income.
This could be a side hustle, an investment, or a part-time job that doesn’t hurt your full-time job. This translates into additional income for you, which means you have more money at your disposal.
Automate your saving
More importantly, set up automatic deductions from your main account to your savings account.
Set up your account in an automated way that allows money to be transferred to your savings account on a monthly basis.
This helps you overcome the trap of trying to save what is left of your monthly salary.
Budgeting method to keep you on track
There are different methods to save your money but for the purpose of this write-up, we will be looking at the 80/20 rule of thumb.
The 80/20 rule of thumb is a simple approach to budgeting. It looks at your take-home income, which reflects your income after taxes, health insurance premiums, and any other expenses that are taken out of your paycheck.
This rule suggests that you put 20% of your take-home pay into savings. The remaining 80% goes toward your expenses.
Ideally, the goal of the budget is to ensure you always pay yourself first.
nairaCompare suggests adopting the 80/20 plan which is a spinoff of the 50/30/20 plan.
Key benefits of the 80/20 budgeting method
The 80/20 budgeting method is one saving approach many have decided to settle for.
There are three key reasons people settle for the 80/20 rule when deciding how much of their salary they should save monthly.
It prioritizes savings
The main purpose of making a budget in the first place is to make sure you are saving plenty of money.
When you save properly, it doesn’t really matter if you spend a little more on housing and a little less on your car or vice versa, as long as you’re putting aside enough money to accomplish financial goals and build wealth.
The 80/20 budget makes saving money a priority. The only definite thing you need to do to stick to the 80/20 budget is to save money.
So as long as you can follow the requirement to save 20% of your income, you’ll have accomplished your most important financial objective.
Another benefit of the 80/20 budget is its simplicity. There’s no need to make a list of dozens of different things you spend money on each month when you make this type of budget.
Also, there’s no need to try to decide in advance if you’re going to spend more on entertainment and less on dining out or clothing or vice versa.
As long as you’re prioritising saving first as the budget calls for, and you don’t find yourself spending too much and going into debt, you can be financially successful with this budget without a lot of hassle.
Flexibility is another huge benefit of an 80/20 budget. If you have a budget where you have set specific spending limits for every different type of expenditure, then you can find yourself in trouble when things don’t go as planned.
If you budgeted a certain amount for foodstuff and then inflation sends prices skyrocketing, you’d have to rework your entire budget.
But with an 80/20 budget, you can just spend what you need on groceries and stop spending on other non-essentials that month once you’ve reached your 80% spending limit.
Strategies to help you accomplish your savings goal
One of the basics of building a financial foundation is saving. By creating a plan and making saving a priority, you’re more likely to develop habits that put your money to work for you.
If you’re looking for help in becoming a better saver, here are some tips on how to set savings goals.
Choose a specific savings goal
Whether it’s a vacation, a college education for you or your kids, decide what you’re working toward rather than choosing a ludicrous number, or a vague idea of ‘saving more’.
Set a savings deadline
Set a timeline for accomplishing your goal. Some goals, like buying a car next year, might be shorter term. Other goals, like reaching your retirement number, might take longer and require more ongoing planning.
Create a different account for each goal
When saving for different goals, set aside different financial accounts for each goal.
Online banking has made it possible for you to set different savings goals for the same account.
Track your goals
Keep track of your progress so that you can see where you stand and celebrate your progress. As you see your success, you’re more likely to feel good about continuing.
And, of course, once you reach your goal, that feeling can encourage you to keep working toward your other goals — and setting new goals.
Automate your goals
Rather than trying to remember to set aside money for a goal, consider setting up automatic transfers and deductions. You can create automatic transfers from a checking account to a savings account to occur on the same day each week or month, creating a situation where you don’t have to remember to make the move and take a separate action.
When you start saving more money or start from scratch, you’ll notice the change in your monthly income — and you’ll have to make some changes. But after a while, those changes become normal, and once you begin to see the progress you’re making toward your goals, you’ll most likely be motivated to save even more money.
So make sure to take a step back every couple of months and identify any extra money or income that could go toward helping you reach your goals!