You Might Be Surprised To Learn How Much Of Your Income You Should Save

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Many personal finance experts will tell you how much money you should save each month as a fixed percentage.

According to a recent study by Yale University economist James Choi, almost half the top 50 rated finance books on Goodreads offer some savings advice. The typical savings rate recommended was 10 and 15 per cent of one’s income.

Out of the six books, four recommended saving 20% or more, while two suggested 50% to save for retirement. Elizabeth Warren’s book, All Your Worth, published in 2005, advocates the 50:30:20 rule. According to this rule, you should spend 50% of your take-home pay on ‘needs’, 30% on ‘wants’, and save 20%.

In Australia, Scott Pape, the barefoot investor, suggests that automated take-home pay (after tax and compulsory super) be divided as such: 60% for ‘daily expenses, 10% for ‘splurge’ spending, 10% on ‘smile’ spending (goals like holidays or a wedding), and 20% into an account to act as a “fire extinguisher” for debts like credit cards or mortgages.

Economists, as it turns out, think savings rates should vary over your lifetime and even be negative at times. Economists think about optimal savings rates in a way that is probably counterintuitive to the layperson,” Choi explained.

While economists may not encourage you to rack up your debts, they understand that doing so can be beneficial in the long run. Student debts, for example, help increase future income-earning potential and allow people to save more as they age.

Choi argues that the government policy mandating all employees to contribute equal percentages of their salary into superannuation annually is not ideal from the perspective.

However, most personal finance experts have two concerns with this theory; the first is that it is necessary to develop savings habits when young.

The second principle is ‘compound interest’ – meaning the money you make from your investment will start to earn its own money, compounding returns over time. The sooner you begin this journey, the greater your chances for long-term success.

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