For the past few months, we’ve been conducting financial planning seminars at companies in Mumbai. It gives us a chance to get to know our users. One of the most common questions we get asked is, “how much should I be saving?”. This is not an easy question to answer, even for trained economists. But let’s not let perfect be the enemy of good. Below, we introduce three ways to go about setting a saving target. Select the one that works for you.
The longer but more accurate way: Identify your goals
What is “enough” savings really depends on your personal living situation. In modern India, people’s requirements can vary. Some want to buy a home. It is very important to them psychologically. Others live at home, or are comfortable renting. For some, owning their own vehicle is an essential goal. Others are comfortable taking public transport. 1 Of course, there are some goals everyone must plan for. Paying down debt. Saving money for emergencies. Building long-term or retirement savings.
For most of these goals, calculating how much you need to save is simple math. For example, if you want to buy that new iPhone 2 in 10 months. Others like your home down payment, retirement etc. are harder to plan for. Fortunately, there are many online calculators that help with that. We ourselves have built a few into our product.
But all this sounds like a lot of work. At EasyPlan, we’ve tried hard to make it easier. But if even the thought of doing this exercise scares you, there is an easy alternative.
The quicker way: Follow rules of thumb
When we tell users the “correct” method above, they often ask us – great, that makes sense, but can you just tell me what percentage of my income I should be saving. Behavioral economists call this a “heuristic” or “rule of thumb”. They are much easier for us to remember and follow.
Now, authoritative research in India on this is quite limited. And as we discussed above, it is complicated by the fact that each person’s financial context varies. but experts suggest that 20 – 30% makes sense for the average youth. This article suggests a neat heuristic – save your age. However, most articles only consider long-term or retirement saving, so you should add to this number for other goals to be safe. As Thaler and Sunstein say in their seminal book “Nudge”, “It is clear that the cost of saving less outweigh the costs of saving too much.” 3
If you’re like many young people, struggling to get by in your first salary, these percentages can sound very intimidating. We ask you then to remember the third, but by far the most important rule of saving. Get started.
The most important rule of saving
With personal finance, many people let perfect be the enemy of good. They think they can’t do anything because they don’t earn enough, they have so many expenses, they are not an “expert”. The list of excuses is endless. So years pass by, and they do nothing.
Don’t be that person. Pick a monthly savings target. Don’t worry about how big that number is, pick something that sounds doable. Then, commit to increasing that number every month by a teeny tiny bit. 4 Again, don’t worry about how large that increase is. The important thing is that you’ve started saving.
So to recap, here are three ways to figure out how much you should be saving. If you have 15 minutes, lay out your goals. If you only have a minute, pick a rule of thumb, or just set a number that seems achievable for you. Bottom line is – don’t bury your head in the sand. Just get started.
- Like me, I’ve never learned to drive. My parents consider that one of my key failures
- What does it cost now? 2 lakhs and your first-born child?
- Thaler, R. H., & Sunstein, C. R. (2008). Nudge: Improving decisions about health, wealth, and happiness. Yale University Press.
- This “Save more tomorrow” tactic has been shown to help people save more. Provided you can commit to the increase in advance, and it is enforced. Read more at Thaler, R.H., & Benartzi, Shlomo. “Save More Tomorrow: Using Behavioral Economics to Increase Employee aving.” Journal of Political Economy 112 , no. s1 (2004): S164–S187.