Sunday, May 29, 2016

How Much To Save Per Month

How much should one save every month? Well, this is really a difficult question to answer. And it is difficult to give a straight answer because it can be quantified in absolute dollar amounts (say, $500 per month) or it can be stated as a percentage of one's salary (say, 20% of household income).

Well of course, one will always hear that you should save 10% of your income. However, I personally think that amount is way too low. It probably is correct when you are first starting out to work and have a low starting base salary (say $2,500). After paying for rent and stuff, it is unlikely that you will have much to spare. So 10% (or $250 per month) is probably a reasonable starting point. But it shouldn't stay that way for long. You probably need to start saving more.

After all (and as a very simple illustration) , if you only have 40 years of working life (let's assume you work from age 25 to 65) and spend 20 years in retirement, common sense or simple mathematics will tell you that you are working for 40 years to support 60 years of living expenses. That means you should only be spending 2/3 (two-thirds) of your income in the first 40 years so that you have 1/3 (one-third) of it left for the remaining 20 years of your life. I am really making many assumptions and simplifying the entire financial planning process so it is really best if you work out for yourself what is a realistic amount. On that basis, saving 33% of your income is probably the way to be safe.

Does this amount sound alarmingly high? Well, yes it is. Life expectancy has gone up and the cost of living has also been creeping up slowly but surely.

Another way to come to a figure is to work out your desired retirement income (or monthly expenses you expect to incur once retired) If you just assume an average expenditure for a married couple of $5000 per month for 20 years, that alone will sum up to $1.2 million dollars in savings that are necessary. That is quite a large sum of money without catering for any buffers. If the couple has a combined household income of $120,000 per annum, it will take them 10 solid years of saving 100% of their salaries just to set aside $1.2 million.

So how much should one save every month? Definitely a lot more than 10% of your salary if you intend to be financially stable and secure. In fact, it might be better to err on the side of caution and save more while you are young rather than to wait till retirement and realise that you have to cut down on your expenditure just to stretch your retirement dollars.

6 comments:

  1. Do you consider our CPF contributions as part of our saving plan?

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    1. Yes, CPF money is your money. So it should be considered as part of savings.But ppl make many mistakes when they think that is enough. Firstly, a large part of it goes to the ordinary account which people use to purchase their house. So that cannot strictly speaking be considered part of savings.Secondly, there is a cap on salary which requires cpf contribution. So ppl who earn more need to realise that % wise, less of their TOTAL salary actually goes to their cpf as compared to a person who draws a salary less than 6k

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    2. i consider CPF as a buffer.

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    3. That's another way to look at it. Should always rely on our own savings since CPF policy might change over time.

      这也是另一个看法。我们应该自己存钱,因为公积金政策有时会改。

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  2. 1/3 is a decent estimate.

    you are right on the money.

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    Replies
    1. Thanks. I think 1/3 should be about right but not sure if others have any thoughts?

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