Tuesday, April 20, 2010

How Much to Save?

What percentage of your income should you be saving?

I was reading Tan Kin Lian's book on financial planning where he advocates saving a total of 50% of your income (inclusive of CPF savings). That works out to be around 15% to 35% of one's take home pay depending on your income bracket with the rest of the savings coming from your contribution to CPF.

This is interesting because most advice that you get nowadays is that one should save 10% of your take home pay. Personally, I feel that TKL is correct. Saving 15% to 35% of your take home pay in addition to your CPF savings should put you in good stead for your retirement planning.

Too often, people think that just by saving 10% of their savings or by just relying on CPF savings, they will have enough for retirement. That simply cannot be the case. If you only have a working period of 40 years in your life (age 25 to 65), saving 10% of your income will add up to only 4 years worth of salary.
How can that be possibly be enough for retirement with the long life expectancy in Singapore?

So throw the idea away that saving 10% of your take home pay is enough. You ought to aim much higher just to be sure.

Breaking the Psychological Barrier

I have related this story to many people before.

Most people have a psychological barrier when it comes to saving. If they have been saving 10% of their income, they find it hard to increase the absolute amount they are saving even as their income increases.

This is because with a rise in income, their expenditure also goes up. So if they have been saving $300 per month since they first started work, it is not uncommon to find that they will STILL be saving only $300 per month even when their income has already doubled or even tripled.

Some people are savers and some people are spenders. So I guess the savers have developed better money spending habits over time. The way to go about saving more is to practice paying yourself first. Make sure that you save a portion of your money before you even spend it. And do make sure that the amount you are saving is minimally 10% of your income.

If you could heed TKL's advice, a savings of 50% (inclusive of CPF contributions) of your income will be a good start.


  1. Good advice FF. For me, I save about 50% of my take-home pay every month, even before I get a chance to spend it. Since it's a %, this amount will go up even if my salary goes up.....

  2. Saving matters but investing determines where you will be in the end. So do focus on your investment.

    Once you are able to invest well and your returns on your portfolio adequately complement your saving then you can afford to spend more.

    You only live once so don't over save too.

  3. Once you are able to do well in investment, you can afford to slack a bit on saving e.g. in my office pantry, there are free 3-in-1 coffee packets provided.

    I can't remember when I stop drinking this free coffee as I dislike instant coffee so I choose to get out of the office and go to the coffeeshop have my coffee break. I don't need to save this extra $1.80 for 2 cups of coffee.

    Going now.

  4. Thanks Financial Freedom for writting the blogs. Your articles are very interesting, though for this save 50%, i have my reservations.

    To me, it is necessary to save, but to hoard 50% of it, will mean the multiplier effect in the economy or global world get lesser.. if everybody save and save 50% or more, there are less spending. Shops have to close as there is lack of business and income, more people will be unemployed. Then in the end, everybody will be worse off.


  5. Saving matters but investing determines where you will be in the end. So do focus on your investment.


  6. What if you are using all or part of your ordinary CPF for housing loan? Meaning one have to save more from your take home income to reach 50% saving rate?

    Frankly quite difficult in today living standard and for my case I’m the sole bread winner.

    I just did a rough calculation and I’m saving around 35%-40% including CPF. But 99% of my ordinary CPF flows out as housing loan. If I will to base on saving from take home income only, my saving is around 20%-25% of take home income. I have factor in a 5% fluctuation for unforseen event ie medical, wedding ang bao etc.

    Overseas holidays and hobby 'expneses' is funded via passive income.

    Make sense?

  7. Saving more than 50% on net earning may be possible for single person or double income family; but can be very tough for sole bread winner with growing up kids to achieve that. For the past years, I hardly have any saving other than CPF contribution.

  8. Savings and investments are only two parts of a 3-part equation.

    If you can't save too much, there won't be much spare cash left to invest as well.

    As such, we need to actively and consciously look out for opportunities to increase our active income sources too.

    Let's say person A saves 300 a month, and manage to compound it at an average of 10% p.a. for 40 years by trading actively. Person A will end with 1.59 mil.

    Let's say person B saves 1000 a month, and manage to compound it at an average of 6% p.a. for 40 years by passive investment into dividend stocks. Person B will end with 1.85 mil.

    Sure, person A's networth grew faster, but every percentage gain requires much more time to access the risks.... The extra time can be spent generating that extra 700 savings (or possibly much much more) per month, and you will end up with even more.

    So when doing financial planning for the future at the moment, do not forget about increasing your active income sources on top of your savings and investments as well.

    That said, my percentage savings varies on the time of the month since my income varies. On average, I save about 70% of my take-home income... Adding CPF, it will increase to about 75%... All excludes the dividends I receive.

  9. Hi FF,

    People are always very amazed by how much I save every month. I tell them it is a virtuous cycle: save -> invest -> passive income -> save -> invest -> more passive income -> more savings -> more investments ... and so on.


  10. Hi ppl,

    I guess 50% is just a rough gauge of how much we should be saving. All saving and no spending makes us dull people too =)

    I really thank you all for sharing your experiences and insights. Indeed, savings need to work hand in hand with investments.

    I like what JW has shared about getting 6% returns versus 10% returns and how our time can be better spent.

    Your model of passive income is what I am striving towards too.

  11. Personally, I never contribute towards CPF, but my system is to have 2 bank accounts. The first one is used for daily spending and giro payments, once the balance exceeds $5000, I transfer the excess to my 2nd account which is my "emergency fund".

    The 2nd account is selected from a bank that provides a good interest rate(Currently StanChart's E-Saver). So once that balance exceeds $30,000 everything else goes into my investments.

    Anyway, in my case save up to 90% of my income. I'm planning to retire at 40 and I don't spend on much.

    It always strikes me as slightly illogical to consider savings and investments separate since they're both subject to the same risks. Banks can go bankrupt and not all your deposits are insured all the time. And with inflation set to increase, the choice between "Guaranteed Loss" and "Risk" is an incredibly simple one.

  12. Hi FF,

    I my savings fluctuate but at a minimum of 50% of my Net income at the moment. Do I find it tough? nope... I still eat good food. I don't shop much though... I don't have a car but I do drive on weekends, pay for parking & petrol. I still can cope with my savings target. Infact, most of the time I save more than that.

    I expect that amount to drop once I move into my own home. Having said that I believe I can maintain at least 30% of net income savings. I don't earn alot but I don't little either.

    I intend to grow this by increasing my salary as time goes by through promotions, increments & better bonuses.

    I believe I can make a fortune from investing in stocks & property but I don't rely on it.
    Perhaps that is what makes the difference for me to save.


  13. Hi XnS,
    As a self-employed person, I guess you need to save a bit more since you do not contribute to CPF.

    Your method of having 2 bank accounts is quite similar to mine. Much easier to keep track and separate accounts for different uses.

    Hi Gohsip,
    Well done. Being able to save 50% of net income is quite incredible really. I think most ppl only save like 5 to 10% of their income.

  14. Hi FF. Though this post is old but I must say I fully agree with you. Anyway I have been regularly popping by, knowing all the few people whom have posted comments at your blog too. :)

    Will keep a tab on your posts and its benefical.

    Have a merry and wonderful Xmas ahead!


  15. Hi Cookieguy,

    Thanks. Great to know that you are still popping by now and then =)

    Sometimes, it almost feels like I am blogging to the air and talking to nobody! Do leave ur comments around so that I know ppl are reading this.


Popular Posts