Am I saving enough? Should I be saving more? Unless you are a savings fanatic, there will come a time when you ask yourself these two questions. If you’re also like the average person, you’ll do so with good reason.
According to the National Institute of Statistics, the household savings rate in Spain is 4.8%. That percentage is fine as a starting point, but it may not be enough to meet your financial goals, starting with building an emergency cushion and continuing to enjoy a good retirement. In that case, how much should you aim to save?
There is no fixed percentage for everyone. The amount you should set aside each month depends mainly on your age and income, as well as your personal situation and goals.
How much should you save according to your age and income?
Salary and financial obligations fluctuate throughout a person’s life. Most commonly, both increase over time. When you are young, your financial obligations and fixed expenses are usually limited, which in theory gives you a great deal of capacity when it comes to saving. Unfortunately, your salary may be equally limited.
As you gain experience, you’ll earn more, but it’s also easy to add more expenses such as a mortgage, rent and children. Does this mean that you will still be saving the same at 40 as you were at 20? Nothing could be further from the truth.
On the one hand, if you save the same percentage of your salary, the amount will increase. On the other hand, it is normal that as you get older you will be able to increase the percentage of your income that you save.
Apart from that, there is a minimum percentage that everyone should save at each stage of life according to a good saving method. The method is the following:
Saving according to age
|Age||Minimum recommended savings|
Savings according to monthly salary
|Net salary||Minimum recommended savings|
The difference between saving too much and saving too little
The tables show the recommended minimum amounts, although it is always possible to go beyond this. In fact, the best savers can manage to save 30% of their income while followers of the FIRE (Financial Independence Early Retirement) movement can reach rates above 50%.
What happens if you fall short of those limits? The most important thing is not to worry or get overwhelmed. You can increase your savings little by little until you reach those percentages or even exceed them. Almost everyone has hidden and untapped savings potential. And you are certainly no exception.
The most important thing is that you are clear about the difference between saving the minimum and going beyond that. The following example will help you understand this idea better.
Juan earns 1,500 euros a month, close to the average net salary in Spain, which is 1,430 euros. This is the difference if, when he was 25, he began saving the minimum recommended at each stage of his life, without taking into account possible increases, versus a person who saved 10 percentage points more at each stage.
|Time period||Minimum recommended savings||Improved savings|
|In 5 years||15.300 €||24.300 €|
|In 10 years||30.600 €||48.600 €|
|In 15 years||44.100 €||71.100 €|
|In 20 years||57.600 €||93.600 €|
|In 25 years||71.100 €||116.100 €|
And this is without taking into account the compound interest
, which helps your money grow faster and increases the differences. In 25 years and with an annual compound interest of 3%, in the first case Juan would end up with 110,7015 euros, but in the second case, with improved savings, the pot would be 178,201 euros.
How much should you have saved at each stage of your life?
If you are sticking to what you have read so far, you will be doing better than most people and you will be securing a good financial future for yourself. If you also want to go a step further, the next question is how much is advisable to have saved according to your age.
Once again, there is no agreed-upon magic figure. Among the most widely used methods is the so-called Green formula, created by financial specialist Kimmie Green. Her roadmap starts at age 30, when you should have saved at least the equivalent of an annual salary. From then on, this figure is multiplied every five years.
This is how it evolves for a person with a salary like Juan’s, of 18,000 euros a year:
|Age||How much you should have saved|
|30 years||18.000 € (1 times your salary)|
|35 years||36.000 € (2 times your salary)|
|40 years||54.000 € (3 times your salary)|
|50 years||90.000 € (5 times your salary)|
|60 years||108.000 € (6 times your salary)|
|65 years||126.000 € (7 times your salary)|
To reach these goals you should save 20% of your salary each year, without taking into account the positive effect of investment and compound interest.
In any case, remember that these figures are a guideline and do not necessarily have to be adjusted to your specific case. The important thing is that, if you are not already saving, you should start to do so. And if you already save and have a buffer for unforeseen events, get ready to take the next step and make your savings profitable.
That is the only way to achieve your financial goals, whatever they may be.