How Much Should You Save for Your Future? A Guide to Savings Planning
Saving for the future is essential for achieving your financial goals. Whether you're saving for retirement, a down payment on a house, your children's education, or for travel, having a savings plan in place can help you reach your goals faster and with less stress.
The Savings Gap
According to the Canadian Payroll Association, over 40% of Canadians are saving just 5% or less of their earnings. This is a significant problem, as it means that many Canadians are not saving enough to maintain their desired lifestyle in retirement or to cover unexpected financial expenses.
Financial Stress
The lack of a savings plan can also lead to financial stress. Over 50% of Canadians feel they are not saving enough, according to the Canadian Financial Capability Survey. Financial stress can have a negative impact on your mental and physical health, so it's important to have a savings plan in place to reduce your financial stress levels.
Emergency Preparedness
A study by the Canadian Payroll Association reveals that only 50% of Canadians believe they could come up with $2,000 if needed within the next month. This highlights the importance of emergency savings planning. Having an emergency fund can help you whether unexpected financial setbacks, such as job loss, medical bills, or home repairs.
The Importance of Savings Planning
Savings planning is an important part of personal financial planning. It is the process of setting aside money on a regular basis to achieve specific financial goals. Savings planning can help you to:
Reach your financial goals faster
Build financial security
Achieve financial independence
How to Set Financial Goals
The first step to savings planning is to set financial goals. What do you want to save for? Retirement? A down payment on a house? Your children's education? Once you know what you're saving for, you can start to develop a plan to reach your goals.
Here are some tips for setting financial goals:
Be specific: The more specific your goals are, the easier it will be to create a plan to reach them. For example, instead of saying "I want to save for retirement," say "I want to save $1 million for retirement by the time I'm 65 years old."
Make your goals realistic: It's important to set realistic goals that you can achieve. If your goals are too ambitious, you're more likely to give up.
Set a deadline: Having a deadline will help you stay on track and motivated.
Now, you might be wondering, "How do I determine the right amount to save in order to achieve my goals?"
Quantifying certain goals is more straightforward than others. Take, for example, planning a three-week trip to Italy next year – it's relatively easy to research and create a realistic budget based on your travel preferences and desires. On the other hand, calculating the savings needed for retirement, which could be 30+ years away and with uncertainties about what that phase of life will entail, poses a greater challenge. While the processes of quantifying a trip versus planning for retirement share similarities, the latter may seem more overwhelming due to the multitude of variables involved.
To assist you in navigating this process, I've outlined a few general guidelines to at least help you take the initial steps. PLEASE keep in mind these are very general and simply represent a starting point. These are not to be considered advise.
The 25x Rule: To determine your retirement nest egg, multiply your desired annual retirement expenses by 25. This is a rough estimate of how much you should have saved.
75% Rule: The 75% rule is based on the assumption that retirees may need around 75% of their pre-retirement income to maintain a similar standard of living in retirement. This estimate takes into account the potential decrease in some expenses, such as mortgage payments and work-related costs, but it doesn't necessarily consider variations in individual situations.
The 10% Rule: Aim to save at least 10% of your income for retirement. If possible, strive for more.
The Housing Rule: Aim to spend no more than 28% of your gross income on housing costs, including mortgage or rent, property taxes, and utilities.
The Emergency Fund Rule: Build an emergency fund that covers at least three to six months of living expenses to prepare for unexpected financial setbacks.
The College Savings Rule: Save enough to cover at least 50% of your child's post-secondary education expenses. Additional funding sources can come from scholarships, part-time work, and student loans.
The Debt-to-Income Ratio: Your total monthly debt payments should not exceed 36% of your gross monthly income. This helps maintain a manageable level of debt.
How to Create a Savings Plan
Once you have set your financial goals, you can start to create a savings plan. Here are some tips:
Create a budget: A budget can help you track your income and expenses so that you can see how much money you have available to save each month. Here is a handy budget tool to help you in creating a budget if you don’t have one.
Cut back on expenses: If you're struggling to save money, you may need to cut back on some of your expenses. Take a close look at your budget and see where you can cut back. I personally like tools such as mint to help track my spending and so I can easily identify where I’ve overspent, or where I really could cut back if needed.
Automate your savings: One of the best ways to save money is to automate your savings. This means setting up a recurring transfer from your checking account to your savings account each month. This way, you'll save money without even having to think about it. Utilize future value calculator tools to plot your progress.
Invest your savings: It's essential to decide not only where to allocate your funds, considering various account options such as TFSA, RRSP, FHSA, etc., but also how to strategically invest within each account. This involves maximizing returns within your risk tolerance and leveraging potential tax savings. Seeking guidance from your financial advisor is a valuable option. Alternatively, I will be covering this topic in an upcoming post, offering insights to assist you in navigating this decision-making process.
Balancing Your Vision with Financial Reality
It's important to strike a balance between your vision for the future and your financial reality. You want to set ambitious goals, but you also need to be realistic about what you can achieve while balancing the current lifestyle you enjoy.
Here are some tips for balancing your future vision with today’s financial reality:
Set financial goals that align with your values.
What is important to you in life? Do you want to travel the world? Buy a house? Retire early? Once you know what your values are, you can start to set financial goals that support those values.
Create a budget that includes both savings and spending for today.
It's important to have a budget that includes both saving for the future and spending money on things you enjoy today. You don't have to sacrifice everything you enjoy in order to save money.
Pay yourself first.
Before you pay any bills or spend any money on other things, make sure to put some money into your savings account. This will help you make saving a priority.
Live below your means.
One of the best ways to save money is to live below your means. This means spending less money than you earn. If you can live below your means, you'll be able to save more money each month.
Find ways to save money on everyday expenses.
There are many ways to save money on everyday expenses, such as cooking at home instead of eating out, shopping around for the best deals on groceries, and canceling unused subscriptions. Spend on the items that align with your life values and vision, save on the others.
Make informed financial decisions.
Before you make any major financial decisions, such as buying a house or car, make sure to do your research and compare different options. This will help you make the best financial decision for your situation.
Don't be afraid to ask for help.
If you're struggling to save money or create a budget, there are many resources available to help you. You can talk to a financial advisor, read books or articles about personal finance, or take a personal finance class.
Planning for your future is a big deal, and creating a savings plan is like your personal roadmap to get there. If the whole idea feels a bit overwhelming, no worries – start with the easier stuff. The key is to just get going. That might mean setting up a regular money transfer or having a chat with your financial advisor. Whatever that first step looks like for you, take it today to set yourself up for a successful future :)