“How Much Do I Really Need To Save?”

Hello ladies and gentlemen. Today is Philippine Independence Day. Same day last year, over a long weekend, I was with a group of friends on a trip in Subic, having coffee and waffles when the topic of the conversation veered towards financial independence (or more like dependence – on credit cards, that is). Today is the first anniversary of that enlightening conversation and I’d like to celebrate it with a quick post.

Everybody’s been telling you to save up – the government, the banks, your parents, etc. – but has somebody actually told you how much you need to save?

It would be foolish to give you a ballpark figure after having you go through an assessment of your own financial standing. By the way, what did you find out from what we did a couple of days ago? Are you now aware of how much you spend on average on a daily basis? I’m sure you’d have an idea of how it builds up over a week or over a month and how it stacks up against your income. The information that you got from your own assessment will help you determine how much savings you would need to have.

Many articles online say that your savings should at least be equal to six months worth of your living expenses, and I agree with this suggestion, especially with the “at least” part. Now, these savings should be kept in an account separate from your current account, just to make sure that you will only have access to it in times of emergency. Why six months? Ideally, you wouldn’t have to need to use these funds but in case the worst happens and you’re out of job all of a sudden, it is hoped that you’d be able to sustain yourself for six months while you’re looking for a job. Obviously the proponents of this rule think that anything longer than six months is too long to be unemployed.

Now, the question is, how do you build up that six months’ worth of savings the soonest possible time. The simplest way, I think, would be this: take your income and divide it into two. Try to keep your expenses within half of your regular income and save the other half. This way, you’d have your six months’ worth of savings within six months. For example, if you have a take-home pay of 20,000, you should only use 10,000 for expenses and save the other half. In six months, you’d have savings of 60,000, equivalent to six months’ worth of your regular expenses.

But some of us can’t afford to allocate only half of our income to expenses. But you’ll surely observe that the more you spend and the less you save, the longer it will take you to accumulate your savings. Not only is it because you save less, but you also have to match you higher expenses. For example, if you earn 20,000, spend 12,000 of that and save 8,000 each month, your six months’ worth of expenses is 72,000. With savings of 8,000 per month, it will take you 50% longer or 9 months to accumulate 6 months’ worth of expenses. And you just increased your expenses by 20% there; imagine if you had higher expenses. The increase in time it will take you to save rises radically.

And before we talk about other investment ideas, make sure you’ve started on your savings plan already.