How Much of My Income Should I Be Saving?
A mixture of progress and pride is the feeling I would have around the second or third of the month when my pay would be distributed among my various accounts: checking, savings, retirement. The same round number would inch my savings account to new heights, and I would breathe a little easier for a day or two.
Once my savings groove was fully established and I reached a randomly selected savings milestone, I took a running leap off the edge and into the uncertainty of freelance life. Extreme discontent in the 9-5 trumped even my biggest money worries, although I was still committed to monitoring my savings account with the diligence of a helicopter parent.
In the year I’ve been freelancing, I’ve had at least half a dozen potential projects fall through. I’ve cycled through another four clients due to budget cuts or changes in direction. I dipped into my savings by a few thousand dollars and then managed to crawl through to the other side. But here’s the funny thing: The deeper I get into self-employment, the less preoccupied I am with the number in my savings account.
That sounds counterintuitive, right? Uncertainty and volatility should breed hyper awareness and worry. But the reason why I was so obsessed with my savings in the beginning was because it offered me the potential to be free. Free to choose the life I wanted to live and support myself in the process. Once I claimed that freedom, my savings could shift focus and the worry could dissipate.
Now I’m in the process of determining how much I should be saving for this new lifestyle, new income level, and new set of priorities. I’ve learned plans for saving should be just as fluid and adaptable as the rest of our lives.
Whether you are several years into a steady job, just out of college, or in the process of creating a path uniquely your own, there are a few ways to ensure your savings is working for you.
Deciding How Much of Your Income to Save
What are you saving for?
When I first started saving, it wasn’t in pursuit of a well-defined goal. It was more of a shield against unexpected occurrences and life events. And once I learned the importance of retirement savings from my pension fund employer, I threw that into the mix as well.
In starting a business, clarity is everything. A vague notion of, “I need to make X amount to survive,” is far less motivating than “I want to work with these types of clients, providing these services, at these rates.” Knowing the end goal is invigorating. Knowing what you need to scrape by just isn’t.
It’s the same with savings.
Not everyone is interested in retiring at the age of 50. And not everyone is in pursuit of a more luxurious lifestyle. It’s about having a full-picture view of what you want to experience and have in your life that lays the groundwork for how much to save and where to save it.
Here’s something else to consider: The longer the runway you give yourself, the easier takeoff will be.
This means anticipating the big life events you might be responsible for paying for three, five, ten years down the road. Scrambling to save for a car that’s a few short months from conking out is financially taxing. Saving for a car a few years, or even one year, before you could potentially need one, isn’t as panic-inducing.
The bottom line? Get clear about where you want and need your money to go in both the immediate and distant future. This will help you understand how much savings you actually need, prioritize your savings goals based on when you need the money, and ensure you’re paying the proper amount of attention to each goal.
What’s your target amount?
What do all those big, hairy savings goals actually look like? Are you saving for a modest house in the suburbs or a loft in the heart of the city? Does a road trip speak to you? Or a five-star beach getaway? All of these require vastly different savings account balances.
Aside from the size of your goals, there are other important factors to consider in order to determine how much you can funnel towards each. These financial necessities might need to be prioritized before pouring your resources into saving:
Savings aren’t actually “safe” in any goal-based savings account until you also have a fully-funded emergency fund. Once this is established, any unexpected expenses can be handled from there - without impacting goal timelines.
Maybe this is one of your target savings goals, or maybe you just have never thought much about saving for life after work, but saving for retirement is a necessity (even if you call it something other than retirement). You can get clear about how much to save for retirement here.
Think of this like your company-backed emergency fund of sorts. Without the proper amount of car, home, renters, or life insurance (if applicable), your savings could be seriously derailed by an unexpected illness or accident.
If you have these bases covered, then let’s pinpoint some numbers:
- What are your savings goals in 6 months? Two years? Ten years?
- How much do you need to fulfill each goal?
- How would you prioritize these goals?
When I was younger, my parents taught me the art of visualization. Before I lose the realists in the crowd, let me explain. They didn’t just show me how to compile pictures onto a vision board, they taught me to take those “visions” and put hard numbers to determine how to make them happen. Goals were made tangible with an amount and a timeline - exactly the things necessary to outline your savings goals.
How much breathing room is in your budget?
Debt is a high-maintenance, soul-sucking financial bedfellow. An otherwise roomy budget can be quickly be suffocated by the cost of student loan and credit card payments. Further exacerbating the situation with savings goals you can’t actually shoulder at the moment will make you want to give up altogether.
So before you launch into a frenzied fit of saving, figure out how much extra room you have and can make for these goals. (And if you don’t already have a debt payoff plan in place, that’s another helpful place to start.)
- Determine the cost of these line items to start:
- Necessities (food, rent, utilities, transportation)
- How much is left over?
- Subtract these monthly contributions:
- Emergency fund
- Now, what’s left?
- Next, decide if these expenses like these can be pared down:
- Subscription services
- Food (beyond the essentials)
- What’s your final tally? That is the amount you can allocate towards doing, seeing, having the life and lifestyle you want.
Maybe you’ll find that goal sweet spot where saving for something in the future is more than worth the sacrifice today. This was precisely where I found myself when deciding whether I would take what lenders say I could afford, or go for a mortgage at nearly half the price. To me, protecting my current entrepreneur lifestyle and continuing to save for “just in case” was worth the lower square footage and finishes. And I know with certainty I will never look back and say “I wish I would have stopped working for myself and bought that bigger house.”
That’s a great place to start with deciding where you would consider cutting back: Determine which savings goals you would remember reaching and which expenses you wouldn’t remember cutting. There’s your motivation.
Here’s a Secret: It’s Not Just About Income
Percentages are a beautiful thing. I might not be able to save $200,000 a year like a millionaire could, but I could save 20% of my income. Saving a percentage of my income will give me the ability to reach savings goals already in line with my current lifestyle - just as $200,000 would do for a millionaire.
What’s the point? It’s not about saving once you reach a certain income milestone. It’s about giving yourself choice at any income level. The choice to do the things that speak to you.
Since I’m no longer saving for freedom, I’ve shifted to saving for the ability to open doors of opportunity - without worrying about mortgage payments and utility costs should I have a down month. I’m saving for the ability to stay strong in my conviction that I’m living the life I should be living. I’m saving for breathing room and peace of mind.
What are you saving for? If you’re saving to check off another financial “should,” let me warn you: Any conviction you feel now probably won’t last. If you’re saving for a purpose unique to you, you might not want to be boxed in by a certain savings percentage. Maybe you’ll be motivated to take that percentage and double it. Or triple it.
Now, wouldn’t that be awesome?