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If you have a clear objective, you also clarify your process
There are several articles about the importance of saving, putting aside your money to create an emergency fund, to take a trip, buy a house or just for anything else you want. But they never tell you the amount or how to achieve it.
And that may be because there is no correct answer. Each objective has its own particularity and it is the people who should define that part based on their income, expenses and savings capacity.
How much money to save?
To begin with, the question that each person must ask is: what do I want to save for? The answer will give you an indication of what is the ideal amount for your needs and objectives.
Of course, it is convenient that you know that there are savings designed for the short and long term. Long-term savings can be your retirement account, pooling capital for a down payment on a house or your emergency fund; a short-term one is one that is destined for specific objectives such as a vacation.
How much to save for an emergency fund
If you are going to create an emergency fund, the most convenient thing is that you can have between three and six months of current expenses in the account, such as paying the rent or the mortgage, household needs (electricity, telephone, water, gas, collection of garbage, among others), food (whether you buy groceries at the supermarket or eat at a restaurant), transportation (public or private) and other services or products necessary for your life.
For example, if you spend $1,500 a month and earn $2,000, then in order to have an emergency fund, with your remaining $500, you should save at least between $4,500 (for 3 months) and $9,000 (for 6 months). If you accumulate that monthly surplus in full, in 18 months you would have collected enough for six months of expenses. But there is no limit, the more you collect for this purpose, the safer you will feel when any type of mishap happens. Although you should not keep accumulating endless money either. When you reach your goal, you could continue sending that amount of savings but to an investment account so that it generates more returns.
How much to save for a short-term goal
Deciding how much to save for your short-term goals is easier. It is best to open a separate account for such purposes. If you’re saving for a car or a vacation, you can figure out in advance how much it will roughly cost you and how much money you need to set aside each month based on that goal.
Always prioritize based on your needs rather than your pleasures, so we recommend that you first meet the objective of your emergency fund. This does not mean that you forget to have fun. To achieve this goal, we have two options for you:
- That of your funds for savings each month, you pay between 60% and 70% of that amount for long-term savings and the rest for the short-term goal, so you do not neglect either of the two items. In the same example of the $500 dollars, then you could save between $300 and $350 dollars for your emergency fund, which would take you to meet that goal in a longer period of time, but the rest you would pay thinking about a necessary vacation..
- That you reward yourself for your achieved savings goals. This means that you first focus on saving as a preventive measure, for example, completing your three-month goal for your emergency fund and by achieving this goal, now you can collect money for your vacations. In short, save the same amount of money, but in different periods of time. Although you put off getting your emergency fund, you may be able to raise enough capital sooner to buy a car or go on vacation.
How to save?
It is always convenient to identify high-yield savings accounts so that your money continues to generate month after month, even if it is a minimum amount. That’s better than leaving it unusable under the mattress. Now how can I start saving? Here are some tips obtained from bankrate:
- Set small goals. If you are clear about how much you earn and how much you usually spend, the most ideal thing would be to save the rest, but we know that this is not realistic. So if you set yourself to save at least 10% of your income, it is a small goal that you can meet. Perhaps with time and motivation, little by little you will increase your savings amounts.
- Consider saving within your “expenses”. The big mistake that many people make is to leave the remainder of their income at the end of the month for savings purposes. When they come to the end of each month, they realize that there is nothing left to save and they put it off until the next month, and so on. So, if you have already established a set amount to save, immediately discard it when you have your income, send it to the savings account and forget about it. See it as paying your regular bills. At the end of the month you will continue to run out of money, but now you have capital saved elsewhere.
- Automate your savings. In addition to the previous point, make the amount of your savings be deposited automatically to the account designated for it. The vast majority of banks have a way to make a frequent transfer of a certain amount at the time you want. For example, if on the 10th of each month, you know that an amount of money will arrive, then automate this transfer for the 11th or 12th of the month.
- Add unexpected gains. We’re not saying you save the entire amount, but if, for example, you get a tax refund, win a prize, have a bonus at work, or have any unplanned income, put a decent percentage into your savings account. Perhaps thinking of 25% (a quarter of that money) would be the most convenient. But the higher the percentage, the better for your savings goals.
Saving is simple, the important thing is that you have the will to do it and with a clear objective.