Sunniva Kolostyak: Welcome to Morningstar’s personal finance minute, where we look to answer some common questions among investors. Today, we’re looking at how much you should be saving.
The amount you put away every month will depend on what you’re saving for, how soon you need the money and, importantly, how much you can afford to save. Saving money should generally not be at the expense of paying off credit cards for example, and loans – the interest rates on a debt pile will only wipe out any returns on savings.
A common saving rule though, is the 50-30-20 rule. 50% of income is for necessities like food, bills, housing, debt.
30% is for what we call wants. These are the things you don’t need but which makes you happy, like clothes, restaurants, holidays.
The last 20% is for savings, whether that’s for your pension, a rainy day fund or an Isa.
But not everyone is able to save this much. The key point here is to save something, however small.
Let’s look at an example. If you saved just £25 a month, and increased that amount in line with inflation each year, after 40 years you’d have more than £50,000 in the bank. Money makes money, so whether the goal is to build an emergency fund, a deposit for a house, or for retirement, the earlier you start, the more you will achieve.
This has been the personal finance minute. For Morningstar, I’m Sunniva Kolostyak.
