You have been saving and investing regularly, but lately it feels like the percentage of your salary you are actually spending is outpacing the amount you are saving. Maybe you’re wondering, “What percentage of my salary should I save and invest?”
In this article, we explore what percentage of salary you should be saving each month to achieve your financial goals. Remember, making money is as important as saving it. The more you save, the easier it’s to achieve your goals.
What Percentage of Salary Should I Save and Invest?
Financial experts recommend that at least 20% of one’s income be saved. This can be accomplished by following the budgeting rule of 50-30-20. Your basic needs, such as rent, should consume half of your income. Your wants should take up 30% of your budget. While the 20 % should go towards your savings.
The 20% of the savings you set aside includes contributions to retirement schemes and any other savings accounts. Although the recommendation is 20%, the amount of money you can save depends on your saving goals, income, and age.
Your saving goals determine how much you should put aside. For instance, if you want to buy a property in one year, then you need to save more. Take the cost of the house and divide it by 12 to get the amount you should save per month.
On the other hand, if you earn a good amount of money, it’s recommended that you put more towards saving and investing. As you move up your career ladder, make sure you increase your savings quota instead of the expense one.
If you have just started working, then you have a longer period to retirement and you can prorate your savings. On the contrary, those who are nearing retirement should consider putting more money into their retirement benefit schemes.
What exactly is a saving goal?
A saving goal is any defined plan you set for your money. It can be either long-term, medium-term, or short-term. For instance, putting money aside for an emergency fund could be considered a short-term financial objective, while putting money aside for retirement could be regarded as a long-term economic aim.
- Short-term goals are financial goals you need to achieve in 2 years. This may include paying off debts, increasing savings for a project,
- Medium-term goals have a time frame of 2 to 5 years.
- Long-term goals take more than five years to achieve.
A typical financial goal should be as below.
- Obtain appropriate career training.
- Create and implement a flexible budget.
- Develop a regular savings and investment program.
- Develop a regular savings and investment program.
- Accumulate an appropriate emergency fund.
- Purchase the appropriate types and amounts of insurance coverage.
- Evaluate and select appropriate investments.
- Establish and implement a plan for retirement goals.
- Develop an estate plan and make a will.
You can break down long-term goals into smaller plans to make it easier to achieve them. You also need to make sure you review your financial goals to make necessary adjustments.
How do you get started with your savings?
One can ensure that they have reached their financial goal by going through a series of steps that can be found here. They are as follows:
Identify a specific goal or objective that is within your reach and set out to achieve it.
The first thing you should do is write down all your goals. This list should contain all your short-term, medium-term, and long-term goals. Please make a list of them in order of priority, and next to each one, list the amount that is required to accomplish the goal.
Do not be vague. It is vital to set clear goals to achieve any financial objective, whether that objective is to buy a car, save for retirement, build up your emergency fund, go on that trip, or even buy that piece of land.
Write down the objective that you want to achieve. It forces you to make a commitment, which in turn pushes you to work toward your goals.
Figure out how much money and time will be required to accomplish the goals.
It would be best if you determined how much each goal requires and in turn you will be able to determine how long each takes. It would be in your best interest to be realistic about it, since setting an unrealistically short time restriction will serve to demotivate you. List the amount of money each goal requires.
It is best to organize the goals in order of priority and allocate money based on that. For instance, the first step is to establish an emergency fund. Let’s say you wish to establish a contingency fund of 100,000 shillings. If you give yourself five months to complete this task, you will be responsible for making payments of 20,000 shillings each month.
You should open separate accounts for each of your distinct objectives.
Most of the time, you may find that you are simultaneously putting money away for more than one purpose. It could be because you simultaneously focus on your long-term and short-term goals. Depending on the goal, choose a savings account appropriately.
When saving for long-term goals, you can consider putting the money in a fixed deposit account or long-term fund that will earn you interest. On the other hand, if you are saving for short-term goals, consider a savings account or fund such as money market funds. Ensure money you are saving for short-term goals is easily accessible.
Start saving towards your goal.
Having a goal in mind is the first step; the next step is working towards achieving that objective. You can have your bank deduct the money you need to contribute to your plan automatically by setting up a standing order for it.
In this way, you are not required to access the money, and you are also relieved of the stress of having to make regular payments.
Keep an eye on the progress you have made.
Monitor the progress of your goals. In so doing, you will be able to note progress, improve, or even rethink the saving strategy. Completing a goal motivates you to move to the next.
Make extra money.
Review your budget constantly and see how to increase your savings. Also, consider increasing your income stream as this will help you save more money and achieve your goals faster.
Where to save your money
When it comes to your choices for savings, you must make the decision based on your goals. Money for long-term goals can be low-risk long-term investments. Get the most out of your money by saving it in the most suitable place. Here are some of the best places to save your money in Kenya.
Savings accounts
This is an account that earns interest at any commercial bank or financial institution, including Saccos or Microfinance Banks. This is ideal for short-term and long-term goals as you choose when to withdraw your money.
Fixed deposit accounts
Fixed deposit accounts are savings accounts with a specific timeline to save money. You can save the money for 6 months, one year, or longer. The interest earned depends on the amount saved and the period.
Money market funds
Money market funds allow you to save your money while earning 8-13% p.a. interest and access it when you need it. Most money market funds allow you to withdraw your cash in 48 hours.
Treasury Bonds
Treasury bonds are debt instruments with minimal risk and a maturity period of 2 to 30 years. They are medium- to long-term investment vehicles that pay interest every six months until the bond matures. Interest on bonds is fixed throughout the term of the bond.
For instance, the government issued the M-Akiba bond in 2017, and the maturity was slated for 5 years. Before you invest in bonds, make sure you confirm fees such as penalties for early withdrawal.
You can invest in treasury bonds as a nominee of a commercial bank or investment bank. Alternatively, if you have an account with the bank, you can invest directly through the central bank of Kenya. The minimum amount you need to invest is Ksh 50,000.
Final Thoughts
In conclusion, there is no definitive answer to the question of how much you should save from your salary. However, saving at least 20% of your income is a good starting point, and you can adjust this number depending on your specific financial situation. Try to set aside money each month into savings so that you have a cushion to fall back on in case of an emergency. Also, consider investing some of your money so that you can grow your wealth.
