Financial security gives you the peace of mind and a sense of reassurance that yours and your family’s present and future needs are taken care of.
If you want to be financially secure, it’s best to start saving money as early as you can and as often as you can.
Moreover, the bigger question is how much money you should save in order to achieve financial independence.
Let’s take a look at the numbers.
How much money should you save every month?
The most commonly used calculation to estimate your targeted monthly savings is the 50/30/20 formula.
According to the formula, you should allocate 50% of your monthly income for essential expenses, 30% of your income for discretionary expenses, and 20% of your income for savings.
The 50/30/20 formula is based on the assumption that if a person starts saving in their 20’s and gets a modest annual return of 5% on their investments, they might be financially independent by the time they retire.
For instance, if you start saving 20% of your monthly income from the age of 25, and if you get an annual return of 5%, it will take you around 37 years to save an amount which is equivalent to 25 times your yearly expenses.
In other words, you would be financially independent by 62, which is the age at which most Americans retire.
It should be noted that a 5% return is a conservative estimate. If you invest your money prudently you might be able to get better returns, assuming you invest regularly and do not panic and withdraw your funds whenever the market goes down.
Where should you invest your monthly savings?
You should put 10% to 15% of your monthly savings into a retirement account and put the remaining amount into an emergency fund.
Even if you do not have an employer-sponsored retirement plan, which many Americans do not have, you can set up a traditional IRA or a Roth IRA, whichever is best suited for your needs.
Owners of small businesses, even single-employee operations, can set up retirement plans of their own as well.
What to do if you cannot save 20% of your monthly income?
No matter how much or how little you might be earning, it can be hard to save 20% of your income on a monthly basis.
In relation to this, it can be done if you are disciplined and persistent enough.
You can start by cutting your current spending to the extent possible. From cable TV to monthly subscriptions, there are many discretionary expenses that you can cut to save more money every month.
Cooking your own meals, buying the necessity items in bulk, and shopping at thrift stores can also help you save a lot of money, which you can save and invest every month.
With that said, even if you cannot save 20% of your monthly income, make sure save as much as you possibly can and gradually try to reach the 20% target down the line.
Remember that something is better than nothing. It’s the saving, investing, and growth mindset that matters the most.
Once you develop the habit of saving consistently, it will pave the way for your long-term financial security and a comfortable retirement.