In recent weeks, we here at Explorer Hop have done a lot of talking about money and how to allocate it. Starting with our blog on allocating your child’s allowance and moving to our blog on how much money to set aside for emergencies, we’ve really focused on budgeting a lot recently.
As part of this discussion, we want to hone in on what we believe to be maybe the most important portion of any financial allocation plan: savings.
We all know that we cannot simply spend all of our money and we must instead put a certain portion of our income towards savings, but we still do not feel that this topic gets as much attention as it deserves. Could this be because, as consumers, we naturally tend to overspend and make saving money a far-too-distant second thought?
With that said, however, in the interest of helping our audience focus on this discussion, our blog today will tackle a somewhat elusive topic: what is the right percentage of income to put aside for savings?
As we all know based on our own spending habits, and particularly our tendency to overspend and under-save from time to time, there really is no hard and fast answer to this question.
One popular suggestion, though, is 20% of your post-tax income, as denoted by the 50/30/20 allocation strategy popularized by U.S. Senator Elizabeth Warren. A lot of the more popular financial allocation strategies – including this one – split money between “needs spending”, “wants spending” and savings, but we tend to think that slightly too much of that allocation is given to the “wants” category.
Please do not get us mistaken. We believe wholeheartedly in enjoying the fruits of your labour and treating yourself with the money you have earned. We all do it, and we will all continue to do so. With that said, however, we believe strongly that a slight shift in the allocation of your money can be immensely beneficial to your future without taking away all the fun that comes with having money to spend on leisure and other “wants”.
To get more particular in terms of our opinion, a specific percentage amount we may recommend for your savings is 25% of your post-tax income from every paycheck.
The reason we have settled on 25% is because we are using the previously identified 50/30/20 rule as a starting point, where 50 represents the percentage of money spent on needs, 30% is for wants and 20% is for savings.
You don’t want to take away from money you would normally allocate towards savings and obviously, you can’t reasonably expect to be able to take allocated money away from your pile for “needs” – because you need to pay your bills and expenses, so there is little room for malleability there.
With that said, however, if you could add some of the money this strategy suggests you use for “wants” to the money you put away as savings, we believe you are putting yourself in a better position to have a strong amount of savings accumulated. Again, of course, this depends on your specific financial situation because you may need more or less set aside for expenses and other “needs” based on your income level etc., but 25% is what we believe to be a good starting point for your post-tax income contribution to savings.
What are your thoughts on the number we picked? Do you think 25% of post-tax income is too little, just right or too much of your money to set aside for savings? Let us know in the comments below.
Now that you’ve read our blog, we hope that you’ve gained some valuable insight into how to save and budget your money. Better yet, we hope that you like our content so much that you even share it with your children.
If you believe that this information is valuable enough for your kids, we hope you take it one step even further and sign your child up for the personal finance programs we offer here at Explorer Hop.
Covering topics from the basics and history of money to the stock market and global finance for children in grades one to twelve, we trust and believe that our programs will help your child get on a path to superior financial literacy both in the present and in the future!
Check our website out today and sign your child up as soon as possible! Happy learning!