Saving money from your paycheque each week can be daunting, especially if you’re already trying to dig out from under the weight of credit card debt, rent or mortgages, and daily living expenses. While it may be easier to say “I give up,” any amount you save is better than not saving at all.
How much you can sock away from each paycheque depends on a variety of factors — including your income, debt, and living expenses. Accepted wisdom from most financial experts recommends you live on 80% of your after-tax income in order to enjoy at least 30 years of retirement.
The standard measure, sometimes called the replacement ratio, shows that you should save enough money to generate an annual income of about 70% of what you grossed in your peak working years.
The experts suggest that in your twenties you should start saving at least 10% of your income, especially if you’re single. In your 30s, you should be saving between 15% and 25%. In your early 40s, you should be squirrelling away between 25% and 35%.
The sooner you start saving, the better. Time is on your side when you’re young, thanks to the power of compound interest. If you have the discipline in your mid-20s to save at least 12% of your income each year, then you can decrease the percentage as you get older. According to this formula, if you’re 25, have no savings, and make $40,000 a year, you should be putting away between $4,000 and $6,000 annually. At 35 and making $50,000, you should be saving between $10,500 and $17,500 a year.
Here are some tips to get you started:
- Create a budget. A budget is a planning device that gives you a clear idea where your money goes on a daily basis. Keeping to a budget is one of the best ways to save money, and forces you to not overspend.
- Watch your spending. The average person spends about $1,725 a year on buying and maintaining clothes You can save a few bucks by just skipping the latest fashions. And if you smoke, perhaps it’s time to quit.
- Netflix and chill. On average, each person spends more than $5,000 a year on entertainment and eating out. Snuggling up at home can save a bundle.
- Trick yourself with found money. When you get a raise, put the increase into an RRSP or a TFSA. Timing the contribution to coincide with the pay increase is a big psychological boost — you won’t miss what you haven’t seen. It’s also a good way to keep up with inflation. You can also stash away tax refunds, bonuses, birthday presents or the proceeds from an inheritance.
- Create a short-term savings account. Unexpected expenses pop up. Create a savings account devoted solely to emergencies — like a new roof, an illness, or a wedding for your daughter — so you don’t have to wipe out your savings to cover them.
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Besides the fact that you will be less likely to spend it, putting your money in a savings account earns interest. Interest on savings accounts is sometimes compounded daily and paid monthly. With compound interest the bank is paying you interest on the money they’ve paid you in interest. That means that if your account earns one percent interest, then each day 1/365th of that one percent of the amount of money you have in your savings account is then added to your total. Make sure you can easily transfer money between the savings account and your checking account.
Retired actuary, Malcolm Hamilton, was often called on for his saving expertise and retirement advice. Now he is retired himself and, as he reflects back, he told the Globe and Mail in an interview that perhaps he over-saved for retirement. “The financial sacrifices we made to get here were, in retrospect, excessive.”
He says that for low income Canadians, government programs such as Old Age Security, the Guaranteed Income Supplement and the Canada Pension Plan will take care of their retirement. Others need to save, but should maintain a reasonable balance between their current and future needs.
On Jan. 1, minimum wage in Ontario went from $11.40 an hour to $14 an hour. The other provinces in Canada are also expected to raise their minimum wage at a graduated rate. Assuming a 40-hour week and a 50-week year, the annual income in Ontario at minimum wage will be $28,000, up from $22,800. After taxes, and with no other deductions, minimum wage take-home pay would be $24,612.66. The poverty line in Ontario, as defined by Statistics Canada, is $22,133 for a single person. That leaves $2479.66 that minimum wage earners can now put into a saving account if they are prepared to live at that poverty line. According to the Bank of Canada, 8% of all employees earn minimum wage.
Saving is a marathon, not a sprint, so don’t allow short-term impulses to thwart your long-term goal — a healthy and stress-free retirement. The best return on savings comes from investing in yourself. Using the money in a savings account for lifetime learning to improve your skills enhances your earning power so that you have even more to save.