Everyone has heard that they should be saving some part of their salary. But, many people just starting their professional careers don’t know how much they should be putting away regularly in order to retire by a suitable age. Afterall, no one wants to be toiling away forever so it’s important to save enough while you can.
The most common saving principle agreed upon is to save 20% of your income.
Although this can vary depending on one’s income level and expenses, the general rule is to be able to save 20% of your monthly income.
Experts suggest that the 50/20/30 rule should be followed.
This means that 50% of your income should go towards necessities like rent and food, etc. 30% of your salary is to be kept for discretionary expenses like new shoes or a dinner with friends. While 20% of your salary should be saved every month. The average entry level job in Pakistan pays Rs. 20,000-25,000. Using a salary of Rs. 25, 000 as an example, if an individual is to go by the 50/20/30 rule that would mean Rs. 12, 500, which is 50%, would go towards necessities. Rs. 7, 500, which is 30% of the salary, should be kept for discretionary expenditures. And, finally Rs. 5,000 should be saved from the salary. This rule is meant for income after tax, and as most salaried people have tax deducted at the source it shouldn’t be too hard to apply this rule.
The 50/20/30 rule is meant to help individuals save enough so they can retire by the average age of retirement.
If one starts working at 25 and is saving 20% of their income monthly every year, then in roughly 40 years they should be able to save enough money to retire and live on. This would allow them to retire at 65 years of age, which is the average age of retirement globally. If we return to our above mentioned example, someone saving 20% of a Rs. 25, 000 salary should be able to save Rs. 2, 400, 000 (2.4 million). Of course for most working professionals, through the course of their careers their income will also rise as their experience and skills become more valuable. With promotions their income level will rise as well meaning it may be possible for them to save a greater portion of their income, and retire earlier, provided that their expenditures do not rise too sharply. And there are also those working individuals who owing to some unfortunate circumstances, like student debt or medical expenses, etc, may not be able to save 20% of their salary regularly. But, such individuals needn’t be disheartened, anything they can save whether its 10% or 5% still counts. What matters is that people try to be financially responsible and save what they can. There are also measures that can help bolster a person’s savings, such as opening a savings account (which unlike a current account) provides profit on your savings, or investing in mutual funds and stocks, etc.