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How Much Should You Save Via A Savings Plan? Here’s A Nifty Calculation

Jul 10, 2018 | 2 years ago | Read Time: 4 minutes | By iKnowledge Team

This is one question that has had financial experts scratching their heads for centuries now, yet no one has been able to empirically answer how much you should save so you aren’t left working forever. Is it even possible to know how much you need forty years down the road? And corollarily, when should you start saving and how?

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Most financial experts would tell you it’s a safe bet to save 10 to 20 percent of your gross income to avert any untoward final stress in the future that is clouded with financial uncertainties, both at the micro and macroeconomic level. But here’s the catch: everyone makes a different amount each month, and has financial obligations different from each other. So it is firstly important to realize that one set amount is not going to work for everyone.

For your twenties

It is really difficult to affix a specific amount for you to save and set aside in your twenties, a phase that is synonymous with paying off student debt, and when career paths are diverse and difficult to generalise. Besides, those pursuing higher studies and research well up to the age of 25 and in certain fields like medicine, policy making and law, don’t start making money until their late 20s.

For this reason, recent graduates and young professionals aren’t expected to have a lot of savings. The mandate to save 20 percent of the paycheck for most of this debt-ridden demographic, is an unreasonable demand, especially with rising costs and lifestyle choices. However, if you can save 5 percent of your income, while siphoning off a good chunk of the paycheck to paying off debt, it is a small but comprehensive step towards that ambitious savings plan which will come later.

Twenty-somethings should ideally focus on becoming debt free, especially as much of their outstanding student loans as possible, and make developing their careers a priority. It will automatically improve one’s net worth, and help avoid mid-life financial crisis owing to job loss, a career bottleneck or dearth of work opportunities.

Financial planner Matt Cosgriff in an interview with Business INSIDER, said, “I try to encourage clients to use 10 to 20 percent of their income to increase their net worth, rather than focus explicitly on how much they’re trying to save.” Growing your net worth can lead to multiple avenues of asset creation, in the form of cash or a retirement plan, even real estate.

It is thus important at this juncture, to introspect on the improvement in your earnings, if any, to see if the net worth has increased by 10 to 20 percent with every passing year since you first joined the job sector. Investing time and money in your career in your 20s will help you make salary jumps. So don’t hesitate to move to a bigger city, attend career conferences, splurge in building a professional network, subscribe to LinkedIn, Washington Post and purchase the premium version of that productivity app you are using, to grow your earning power. This usually works towards creating a future wherein you will be able to save better and more.

In your thirties and forties

The real struggle with thrifty scrimping begins in your 30s and 40s, when you are ideally more financially stable. It becomes mandatory then, to save not only for your retirement savings account, but to save up money for an emergency fund or for long-term financial goals like a down payment on your home. A savings plan in your thirties must necessarily include a saving investment plan to inculcate a health asset-building process. Once you get the hang of monthly household expenses, saving 10-20 percent of your income will become a mental arithmetic for you.

Credit: Reserve Bank of India

An asset management chart or savings plan calculators will further clarify how much you should have saved at the present stage of your life. According to the JP Morgan Assessment chart, for example, the intersection of your current age and your household income tells you how much you should have approximately saved. Aegon Life Insurance offers savings investment plans and insurance plans that guarantees annual payouts of 150% of annualized premium, tax benefits with a limited premium payment term. With the help of Aegon’s iGuarantee calculator, you can determine how much you should put aside for retirement, emergencies and contingencies, based on your specific parameters and needs.

To sum it up, there’s a huge downside to internalizing the fabled X amount as the standard goal to your saving plan. Although it is a safe target, such lofty numbers may deter you from taking the small step that is absolutely essential to begin. Often, people throw up their hands, saying it’s never going to happen. But saving starts as a habit; like a tissue that grows to become a muscle and later an integral part of the body, your savings plan must become a natural part of your financial life. It is important, especially if you’re not used to saving, to imbibe the habit first, rather than getting discouraged by a magic number that feels out of your reach.

Advt. no.: IA/Jul 2018/4187


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