I thought it might be interesting to go through the concept of savings ratio, different types of savings and then share with me how Mr. and Mrs. Good Finance save each month.
The term is just as it sounds a quota or a percentage. The savings ratio indicates how much you save as a percentage of your disposable income. Say that you earn USD 20,000 after tax and that USD 10,000 is saved each month. The savings ratio will then be 50%. If you had saved USD 5,000, the savings ratio would be 25%, if you had saved USD 15,000, the savings ratio would be 75%.
Even if you have a savings rate of 50%, everything may not go into the money machine. I usually say that there are three different types of savings
- Saving to the money machine
- E-Money savings
I was going to briefly go through all three.
Saving to the money machine
This is the money to get into the money machine and work for you, the rest of your life. With this money you build your future freedom and it is a very important saving to achieve financial independence. Savings here should be as large as possible and invested in shares or funds.
Target saving is another type of saving, it is really deferred consumption. Perhaps most for a little bigger stuff like an investment in apartment / house, car purchase, travel and other more expensive gadgets. The money is saved in a regular bank account. If you are an extreme saver then I suspect that you skip goal saving and put the money in the money machine directly.
I think everyone should have a E-Money saving. A E-Money is good to have if something unforeseen happens. The car breaks down, the roof of the garage starts to leak, etc. If you have a house you should have a slightly larger E-Money than if you live in an apartment. If you have a car you can have a little more than those who do not have a car.
A common recommendation on the size of the E-Money can be between 1-2 monthly income after tax. Our goal is eg to have USD 50,000 in E-Money. We have a house and a privately owned car. The E-Money should be easily accessible and saved in a savings account eg.