How much money should you save as a percentage of your income? Under 50/30/20 law, you should save 20% of your income. But it’s not always that easy. Of course, there is another way – credit today, which makes it easy to achieve the desired goals and other reasons why people want to save money. If, however, the loan does not seem to be the first or only solution for you, it is worth looking into how much and how to save.
Your income or return on investment is the biggest factor for financial security or for achieving specific goals. But how much should you save? € 50 a month? 50% of your salary? Nothing until you get back all the debts, or can you start earning more money?
How much should you save each month?
Many sources that can also be found on the internet recommend saving 20% of your income each month. According to the popular 50/30/20 rule, you have to make sure that 50% of your budget is invested in key areas such as rent and food, 30% of discretionary expenditure and at least 20% of savings. The 50/30/20 rule was widely used by EC Finance, who taught her when she taught bankruptcy. You can’t disagree with this suggestion, but not everything is as simple as saving 20% of your monthly income or recommending the right income that you can save. For example, if you have a high level of profit, wise action would be to keep a low level of spending and save much more of your income. On the other hand, if saving 20% of your income seems incredible or even impossible, there is no need to bother it and feel frustrated. Saving something is better than not saving anything. But if you want to get old-age insurance and extra money for the things you want, the stake shows that 20% is the number you want to reach or exceed.
How much money do you need to save to do this?
This is a good question. The simple answer: everything depends on different circumstances, such as whether you want to live on the verge of poverty, whether you need two homes and a boat, or whether you are somewhere between these two extremes. It also depends on how well your investments are made. If you can earn an average annual profit of seven percent, you can stop working with much faster than if you deposit just three percent.
For the sake of simplicity, we will use the “40% Law”, which states that you can theoretically postpone four percent of your primary balance each year and live with it for an indefinite period of time. This means that you will have to keep your annual costs 25 times in order to become financially independent. Remember, 25 × 4 is 100, and 100% = your total balance.
Of course, there are also problems with 40% of the law.
One of them is that there is no investment without risk with a four percent return. Sudden inflation could also become a problem. To confirm this, and based on the principle of simplicity, we will calculate how much you need to save in terms of your gross (pre-tax) income, not your expenses. We assume you want to save an amount of 25 times your annual income instead of your annual expenses. By default, you will actually save more than necessary (because when you are financially independent you can stop saving). But when discussing your source of income for the rest of your life, it is best to be conservative.
How long will it take?
Here’s how long you will be saving 25 times your earnings, taking into account the percentage of your savings. Taking into account the five percent savings from the average annual profit, the more aggressive placement of assets is taken into account while you save.
Percentage of Saved Income versus Time Required to Save 25x Annual Income:
- 1% – 100 years
- 2% – 86 years
- 5% – 67 years
- 10% – 54 years
- 15% – 46 years
- 20% – 41 years
- 25% – 37 years old
- 50% – 26 years old
- 75% – 21 years old
- 90% – 19 years old
As you can see, saving 20% of your income will bring you 25 times your annual income in just over 40 years. This means that a 30-year-old who is starting to save today (assuming that he has not previously saved) will reach this goal by the age of 71. If you save less than 20%, it will simply take too long for your money to grow to where it will allow you to live only from it. Remember that you only need 25 times the amount of your annual expenses, not your income, to make you financially independent. The lower your spending, the faster you will reach your personal savings target. Taxes are not taken into account in the savings scheme.
What if you save so much?
Definitely someone might have comments “How funny! I spent almost everything I earned on renting, food and transport! ‘ If the 20 percent scenario does not correspond to your situation, it does not mean that you will have huge financial problems. Everyone should try to reach 20%, not everyone should achieve this goal in the first attempt. Start with little. Start with one percent. When it doesn’t affect that bad, go to two or even three. Maybe you will reach five percent and it will look pretty good for you. Maybe you will make a decision about the jump by 10% and this will put you in stress, so you go back a step. This is a process. Keep that 20% target in mind all this time. It will deter you from complacency. Increase your savings level every time you get a raise! You have already given up well without this money, and you should not miss it if you never get used to it. Debt and an additional loan is another scenario that requires another strategy to achieve the desired result.