Breaking the Psychological Barrier
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.
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