With an economy like ours in Nigeria, how much money should you save every month? There are many ways to answer this question.
The short answer is that you should save a minimum of 20 percent of your income. At least 12 percent to 15 percent of that should go toward your retirement accounts. The other 5 percent to 8 percent of that should go toward a combination of building an emergency fund, creating other long-term savings, and paying down debt.
While that’s a good rule of thumb to follow, it’s not the only answer. If you want a more in-depth answer, read on.
What Are Your Financial Goals?
To take a deep dive into figuring out how much you should save each month, start by looking at your goals.
Roughly speaking, your financial goals will break down into three buckets:
- Expenses that are coming up within less than a year
- Expenses that are coming up within less than a decade
- Very long-term expenses which are a decade or more away
Short-Term Financial Goals
Expenses coming up in less than one year are things like taking a vacation, buying holiday gifts, making sure you have enough money on hand to pay your taxes, and maintaining savings for a birthday celebration.
Another example of a short-term financial goal is saving up six months’ worth of expenses in an emergency fund. You could do this in less than a year.
Long-Term Financial Goals
Under the less than a decade category, include expenses like replacing your appliances, making major home repairs, purchasing a new car, or making a down payment on a house.
Extremely Long-Term Financial Goals
Under the longer than a decade umbrella, your goals might include building a sizable education savings fund for your children or purchasing a second home.
Of course, you should also include the ultimate long-term savings goal: retirement.
Create a List, Plan, and Calculate
In the list of expenses you’re currently saving for, include everything else, such as weddings, home repairs, holidays, travel, and education savings.
Now write down your ideal savings target and the deadline. Do this for every single goal on your list. Then divide that time frame by the amount of money you need for each goal.
What to Do When Your Savings Goals Exceed Your Income
What can you do when this happens? First, modify or cut a few of your goals. Can you purchase a cheaper car? Throw a less expensive wedding? Buy a less expensive house, which will require a smaller down payment?
Next, look at ways you can cut your current spending. Canceling cable TV can allow you to save an extra amount of money per month, which you can put toward one of your many savings goals.
Then see if you can extend the timeline for any of your goals. Do you need to replace your kitchen appliances this year, or can you live with your current appliances for a few more years?
Finally, look at ways you can earn more money, such as through freelancing on the side.
In summary, there are two ways to answer the question, “How much should I be saving?”
If you’d like a specific custom-tailored answer to this question, you’ll need to spend at least 30 minutes writing out your goals and anticipating big-ticket purchases. If you want a quick and dirty rule of thumb answer, then make sure you’re saving at least 20 percent of your income.
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