How Much Money Should I Save How Much Should I Have In Savings?
Saving for financial security and a debt free future in Australia
Are you saving enough? Are you saving too much? Find out how much you should save for each reason and then create or tweak your budget so that you can be safe from increasing debt, bankruptcy and insolvency.
If you’ve asked this question before, out of concern for your financial security, you may have gotten the response: ‘save as much as you can’. This isn’t overly helpful, for to avoid debt and bankruptcy you need a guide to your spending that you can follow. If this platitude was your strict guide, then you would never buy anything. But you need to right? So this undermines the validity and usefulness of this statement and puts it straight into the gargantuan pile of aphorisms that are too absolute to be useful but if they were less absolute they would be too wordy and not catchy enough for anyone to use them.
The main problem with this chuck-it-all-into-the-rainy-day-fund attitude is that it doesn’t let you distinguish at all between emergency savings and investments. Emergency savings should be able to be used at the drop of a hat, whenever needed (they should have high liquidity), but consequently they are usually not as lucrative as investments. Alternatively, investments are those funds that you dedicate entirely to making more money. These are often harder to use at a moment’s notice (lower liquidity). For instance, breaking a term deposit often forfeits interest and selling shares at an unplanned time is doubtless not going to get you the best return.
So we’re going to provide you with a guide for how much money you should be saving. And this guide is follow-able, reasonable and it accounts for your situation. Hence we won’t be expressing it in the form of a one-liner. We’re going to give you a breakdown of how much you should save for each reason for each financial situation and then you will have worked out how much you need to save.
The Baseline Minimum Amount You Need in Emergency Funds | Financial Security Sydney
You should always have money saved to avoid debt trouble
Here’s actually a realistic rule-of-thumb for the minimum amount you should have in your emergency savings: have enough to last 3 months. 3 months is an adequate amount of time for most crises; for you to get back on your feet and become financially stable again. If everyone affected by a crisis had 3 months worth in their rainy day fund (and that’s wishful thinking, because we understand that there are many people in very abject unavoidable situations), then there would be a lot less homelessness, debt and bankruptcy in the world.
What are examples of crises that should take 3 months to recover from?
Losing your job.
Unpaid leave due to injury.
Unpaid leave due to an ailing family member.
Most large, unexpected expenses like fines.
So how much is enough to last 3 months?
The actual amount will be different for each person, but the way to calculate it is the same. Record how much you spend in a month then multiply by three. For a more accurate estimate, record how much you spend in a larger amount of months, average them, then multiply by three.
In Microsoft Excel it looks like: =Average(Month1, Month2…)*3
Where should I store my emergency funds?
Liquidity and low risk are the key. They need to be easy to withdraw. So a simple personal savings account with a reputable (often a large) bank with no penalties for withdrawing is the most obvious and common option. Term deposits, shares, assets and other forms of saving can deliver returns far surpassing the meager 1% you’ll be getting on your emergency funds, but that’s compensation for the increased risk and decreased liquidity of where you’re putting your money.
Retirement Savings & Superannuation
Saving for your retirement with superannuation
Retirement savings include your superannuation, which should be enough to live adequately after you retire unless you’ve been out of work for long stretches. The thing is, that it may not be enough to live comfortably. There are many situations where this is the case:
You retired early due to unfortunate circumstances.
You were permitted by the Australian Taxation Office to access your superannuation prematurely due to severe financial hardship.
You’ve worked low paying jobs for most of your life.
You’ve mostly worked cash-in-hand for most of your life.
You immigrated and for one of a multitude of possible reasons have less superannuation as a result.
To prepare for these circumstances, it is beneficial to have more savings set aside for your super. As your retirement is expected to be a long time away, these savings can go into a longer term investment with lower liquidity than your emergency savings, but you shouldn’t undertake more risk. The world may change a lot before you retire and you depend on that money for your twilight years.
You can also make extra contributions to your super which can be hugely beneficial to you over all super savings as your super gets interest. So the more money in your super account the better prepared you will be for your future. Saving for your future may not be as important when you are younger, but when you start ageing in the workforce you will start to realise how important it is. For this reason it is important that you keep all of your super together in the one account to get the most interest possible.
Many young people have multiple super account. This is mainly the fault of the place where they work, asking for super information immediately when people might not have it on them. So instead of waiting and getting the correct account information, another super account is opened while the other one lies dormant. Make sure that you combine your super to have better savings long into the future.
Goal-Orientated Savings | Saving Money Melbourne
Save smart with goal-oriented saving
Goal-orientated Saving means saving for spending—saving up so that you can buy something at a later date. This is the least crucial form of saving because it is less future-oriented, less financial security oriented, not investment oriented and in fact, is much more like spending than saving.
If you want to make a large purchase, that’s ok, not financially optimum, but definitely more along the lines of the sayings ‘live your life to the fullest’ and ‘money is for spending’. But, it’s only ok under the condition that you are saving enough in your emergency fund and retirement savings. Otherwise, your goal-oriented saving runs more along the lines of ‘spending money that you don’t have’.
The amount of goal-orientated savings, plus the amount of actual spending (because they really are the same in the long-term) can be guided by the 50/30/20 rule:
50% of your budget should go towards essential living expenses.
30% should go towards nonessential spending. This includes goal-oriented savings.
20% should go towards saving, investment, repaying debts, debt fees, etc. This final category may be larger if you have considerable debts, are building an emergency fund, are increasing your retirement savings or are investing enthusiastically. ≥20% in this category can be a very financially savvy move.
If you follow this guide to saving, you will be a lot less likely to suffer from insolvency, spiraling debt, bankruptcy homelessness and all associated problems with financial security. We wouldn’t wish this upon anyone. And you should set yourself on the path towards financial security, with solid investments and savings accumulating over time, until you retire in comfort. We hope that this article helped you create or tweak your budget and that you have a fruitful financial future.