How much should I save?

What I do: I save about 40% of my take-home income.

Save 20%. The popular 50-30-20 framework is a good rule of thumb. Spend 50% of your income on necessities, 30% on wants, and save the remaining 20%.

But the other answer is: Yes.

Start small, and grow from there.

It’s like training to run a marathon. Or a half marathon. Or your 2.4km. For the couch potato, we wouldn’t go straight into 6 sets of 400m sprints. We would start with a 1km jog. Or even a walk. The point is to get started.

But we won’t achieve a marathon with that alone. We will build fitness over time and run faster and for longer.

Likewise, we may not have much savings capacity early in life. Our saving ability is limited by lower income and big expenses like education, housing, and weddings.

It’s okay if you can’t save much at the beginning. But get started, and keep up the habit.

Pay yourself first. When you receive your paycheck, put away the amount you intend to save.

Why do we save?

Resilience and safety.

We don’t have a crystal ball that tells us what our expenses will be.

Sometimes, life happens and we need savings to deal with it. Broken appliances, medical emergencies, job loss.

Savings help us to meet unexpected expenses without incurring significant hardship. If you are seriously ill, you don’t want to be pawning off items from within your house to pay off the doctor.

A good rule of thumb is to have an emergency fund that can cover 3-6 months of expenses. That’s why we need to know how much we spend per month.

An emergency fund is important. It is like a seat belt that protects you in case of an accident.

Once we have the emergency fund in place, we can think longer term.

What are we saving for?

You might have large, predictable expenses coming up soon. A house, a wedding, education fees, a car, a child, a vacation.

You are not the CEO of DBS. You would not be buying a car with your income alone.

We save so that we can afford these large expenses.

Sometimes we can’t save enough. That’s when we borrow money to cover the remainder. That is debt. Used wisely, it is a blessing. Used foolishly, it is destruction.

Finally, we save for financial independence and retirement.

In the next part of our journey, we find out how to invest our savings to fund our expenses and our retirement.