Everywhere we turn it seems that people are telling us to be Debt Free and to Save All of Our Money, but why? Being debt free gives us the freedom to spend that money on other things instead of making debt payments. Saving Money allows us to have a Plan B in case of an emergency or take that trip that we have always wanted to. However, having debt doesn’t mean that we are broke and spending money doesn’t mean that we aren’t saving money too.
The saving rules are different for everyone. Not everyone who makes $80,000 per year has the same expenses and therefore the savings ability among people can be different. Everyone who is classified as Middle Class has different priorities and different reasons for saving or spending their money. I am a big believer in spending money to live and love our lives. I am also a big believer in saving money for a reason, not just to accumulate wealth. The truth is that if my bank account has more money than your bank account it doesn’t really matter because our money won’t keep us warm at night, and money has no value if it is not spent.
With all that being said as a Financial Planner people/clients often as me “How Much Money Should I Be Saving?” The truth is that there is not a universal answer to the savings question. However, there are guidelines that can be followed. Ideally if we have less expenses we can save more money, and as we are trying to experience new things we may spend more money than we save.
When we are young and we are first starting to earn our own money our priority may be to spend. But the truth is that if we start working at 15 years old and we attend college at 19 years old we could save a lot of money in those 4 years. At this age we don’t really need to save for the long term aka retirement. We could split our money 60/40; we could save 60% for college and spend 40% on our monthly cell phone bill and other personal expenses.
During college we have a lot of expenses such as tuition, books, school supplies, and living costs but the problem is that we don’t really have a lot of income. However, we still need to save some money during college because after graduation we may have debts to pay off and we definitely have a new life to start. If we can afford to split our money 70/30 and try to save 30% while we spend 70% of our income (loans, bursaries, part time job etc.) on our expenses, we would be in a really good position after graduation. As an example lets say that the average annual student income is $10,000. If we save 30% of that over 4 years we will save $3000 per year and we will save $12,000 by Graduation.
As we get married, start a family, and buy a home our expenses can definitely add up quickly. However, now is the time that we need to start saving for our retirement and start saving for emergencies. When we are single emergencies may be easier to deal with, but as a family with a monthly mortgage payment unplanned emergencies can be devastating. The reason it is important to try and save as much as possible during this stage of our life is because our previous savings were probably spent on the purchase of our new home. It is important to start rebuilding our savings and start saving for retirement. As a general guideline our income at this stage of our life should be split 80/20. 80% of our income will be used for monthly expenses and paying off our accumulated debts while the other 20% of our income should be saved. 10% (of the 20%) should be short term savings for emergencies and 10% should be saved for retirement.
The closer we get to our retirement our mortgages get paid off and we become more responsible with our debts. This is where the savings guidelines start to turn around. As our expenses get lower our savings percentage gets higher. Our income can be split 35/65 with 35% of our income being saved for retirement and 65% of our income being used for expenses. By this time our emergency savings should be built up enough that our focus should be retirement as we approach that golden age.
During retirement is play time. Expenses are low, income can be moderate (if we planned correctly) and savings for life experiences are high. Nothing in retirement is long term. Planning and saving for the long term is over. Our whole life we have planned for retirement and now we are finally there. It’s time to enjoy our money. We should split our income 25/75 and save 25% while spending 75%. In retirement we don’t really need to save a lot of money because our wealth has already accumulated. Saving a small portion for everyday emergencies and personal indulgences is a good idea. But with all the free time we have on our hands we should definitely spend our income during retirement and enjoy our lives. If we don’t want to spend our accumulated savings that is ok, but our income should be spent on hobbies, travelling, and good times. Remember…even if you save every dime, you cant take it with you.
(Photo by Mait Jüriado)