This is one of the most frequent questions asked by people around – how much should you actually save. And like any other answer, the right answer is:

It depends!

On what?

What is your annual income? This will give some idea on how much lifestyle expenses you can have and for what kind of goals you need to save for.

What is your age? This will help in giving rough understanding of amount you have earned so far and how far you are from the retirement.

What are your interests? Because lot of your short term savings will depend on your interests.

Lets take an example of 27 year old Shikha working in an IT company earning around Rs 12 Lakh per annum and living in Bangalore. Let us also assume that she loves traveling and also want to buy a fancy car.

After saving for tax and paying tax, she will be left with approximately Rs 80K per month. For one vacation in an year, she would need approximately Rs 1L if she wants an international trip. Likewise, to buy a car worth 5L, she will need to save Rs 10,000 per month approximately. She might get married in a years or two  and as she is a independent woman. She wants to do all her shopping from her own savings and hence creating Rs. 2L for it for that Rs. 10,000.

In general more the aspirations you have, more you will have to save (and earn more money on your savings).

There also need to be some savings for emergency expenses. Like it or not, someday you will stop getting salary when you retire – you need to save for that as well. Rule of thumb is that you should save around 10% for your retirement. In Sikha’s case, her tax saving and PPF account will take care of her retirement.

So coming back to overall savings for Sikha:

Vacation account: Rs. 8000 / month

Car account: Rs. 10,000 / month

Wedding Shopping: Rs. 12,000/ month

Emergency: 10,000 / month [this 1.2L will be added to her overall emergency kitty, that should be 6 months worth of her salary]

Total savings for Sikha comes around 40,000 / month compared to her Rs 80,000 income. That is roughly 50%. Now that looks high but it not that difficult to do. She still have Rs. 40,000 for her regular expenses. Also, as I mentioned, more aspirations you have, more you need to save. If this is very difficult for her, she will have to cut down her expectations.

So, try mapping this method for your income, age and interests – you might not get the exact numbers but at least you will have a rough idea how much to save.

Bonus point:

Saving can look daunting but by applying behavioral psychology concepts, you can make it easy to save for your aspirations. How? There are two important ways:

  1. Setting aside accounts for your specific goals make it easier for you to save. When you tag the money with something, you start treating it differently.
  2. Saving small amount of money is always better than saving one large chunk. By taking small amounts every now and then, you save even without realizing how much money you have saved.