This outlines how to determine the optimal amount to save from your monthly income, based on your long-term savings goals.
If someone asks me how much they should save from their monthly income, I usually ask about their plans. This is because the amount they should save depends on their savings rate and long-term understanding of saving.
There are three time periods to consider: less than 1 year, less than 10 years, and lifetime. Short-term savings can be used for things like holidays or settling taxes, while long-term savings can be used for retirement or big expenses like buying a home.
Retirement
To determine how much to save for retirement, aim for 10-15% of your income. For emergencies, you should have an emergency fund that can cover 3-6 months of your living expenses. To save for other expenses within the next 10 years, make a list of primary expenses and divide the savings target by the remaining number of months.
Emergencies
If you can't save enough for all your goals, you can revisit your plans, increase the time it will take to achieve them, reduce current expenses, or earn more. As a general rule, at least 20% of your income should go towards savings.
Earn More
In summary, the amount to save monthly depends on your plans and long-term savings goals. Consider different time periods and allocate your income accordingly to achieve your financial objectives.