Financial Planning Tips: How to Save More Than 20% of Your Annual Income

Saving money is crucial for your financial health. It provides a safety net for emergencies, allows you to achieve your financial goals, and can even pave the way for a comfortable retirement. Yet, knowing how much to save can be a puzzle. You might have heard of the 50-30-20 rule. The 50-30-20 rule suggests stashing away 20% of your income for savings, but is that really enough? As it turns out, saving more than 20% can significantly bolster your financial health. The more you save now, the more you will have for the future. Whether it is building an emergency fund, saving for a down payment on a house, or investing for retirement, saving a larger portion of your income can accelerate your progress toward these goals and provide you with greater financial flexibility down the line. But it is easier said than done. Saving more than a fifth of your income requires a tactful approach and a commitment to financial prudence and discipline.

A financial advisor can help you understand how to save more than 20% of your income. This article will also give you some practical tips to help you save more than 20% of your income so you can build a solid financial future.

Below are five tips on how you can save more than 20% of your income:

Tip 1: Make a monthly budget and stick to it

Saving more than 20% of your income may seem like a daunting task, but with the right approach in place, it is entirely achievable. Crafting a monthly budget plan is one key approach to ramping up your savings. By taking control of your finances through budgeting, you can gain a clearer understanding of your spending habits and spot areas where you can cut back to allocate more towards savings.

The first step in this process is to determine how much money you can feasibly set aside each month for savings. Creating a monthly budget allows you to map out your income and expenses in a systematic manner. This provides you with a realistic overview of your financial situation. You can begin by listing all your sources of income, including your salary, freelance gigs, rental income, business income, or any other sources of revenue. Once you have a clear picture of your income, it is time to analyze your expenses. Break down your budget into various categories, starting with fixed monthly expenses such as rent or mortgage payments, utility bills, transportation costs, groceries, medical expenses, and clothing. These are the essential expenses that you need to cover each month to maintain your standard of living. After accounting for your fixed expenses, you can allocate a part of your income towards paying off any loans or debts you may have. This could include student or home loans, credit card debt, or car payments. Prioritizing debt repayment enables you to free up more funds to put towards savings in the long run. Once you have covered your necessities and debt payments, it is time to budget for your discretionary expenses. These are the wants in your budget, such as dining out, entertainment, travel, and shopping. While it is essential to enjoy life and indulge in occasional treats, you must try to keep these expenses within a reasonable limit to maximize your savings potential.

Once you have identified your income and expenses, you gain a clear understanding of where your money is going each month. This insight is crucial because it allows you to see where you might be overspending or where you can cut back. For example, you might realize that you are spending more on dining out than you thought or that you are paying for subscriptions you do not use. With a budget in place, you can prioritize savings as a non-negotiable expense. Instead of treating savings as whatever is left over at the end of the month, you allocate a specific amount to savings from the get-go. Treating savings like any other bill ensures consistency and that you are actively working towards your financial goals. Budgeting involves allocating funds to different categories based on their importance and your financial goals. This means setting aside money for essentials like housing, utilities, and groceries first, then allocating funds for debt repayment, if applicable. Once these priorities are taken care of, you can allocate the remaining funds towards discretionary spending and savings. Budgeting is not a set-it-and-forget-it process. It requires ongoing monitoring and adjustment to reflect changes in your income, expenses, and financial goals. Regularly reviewing your budget and making tweaks as needed can ensure that you are staying on track with your savings targets and making the most of your income.

Tip 2: Use percentages to guide your budget

Using percentages to guide your budgeting decisions can be an effective strategy in helping you manage your finances more efficiently. Instead of focusing solely on specific dollar amounts, allocating a percentage of your income to different categories provides a flexible framework that adapts to changes in your financial situation. One helpful aspect of this approach is its simplicity. Breaking down your budget into percentages helps you gain a clear understanding of where your money is going without getting bogged down in complex calculations. For example, you might decide to allocate 40% of your income towards needs, such as housing, utilities, groceries, and transportation. These are essential expenses that you must cover to maintain your standard of living. Next, you might allocate 20% of your income towards wants, which include discretionary spending on non-essential items like dining out, entertainment, and shopping. While it is essential to enjoy life and treat yourself occasionally, limiting your wants to a specific percentage of your income helps prevent overspending and ensures that you are prioritizing your financial goals. Finally, you can allocate the remaining 40% of your income towards savings and investments. This category encompasses various financial goals, including building an emergency fund, saving for retirement, securing your health expenses, and investing in long-term wealth-building opportunities. Prioritizing savings and investments allows you to set yourself up for financial security and future success.

One of the advantages of using percentages to guide your budget is its flexibility. Unlike fixed dollar amounts, percentages allow your budget to adjust seamlessly to changes in your income. For example, if you receive a raise or find a new job with a higher salary, you can automatically increase the percentage of your income allocated towards savings and investments. This allows you to capitalize on your financial growth and accelerate your progress towards your goals. Conversely, if your income decreases due to factors like job loss or salary reduction, your budget automatically adjusts to reflect this change. Maintaining the same percentage allocation towards savings and investments helps you prevent yourself from overextending financially during leaner times. This built-in flexibility provides a sense of stability and ensures that your budget remains sustainable regardless of fluctuations in your income.

Another benefit of using percentages to guide your budget is its ability to prevent lifestyle inflation. Lifestyle inflation occurs when your spending increases in proportion to your income, leading to a cycle of perpetual consumption without meaningful progress towards your financial goals. Allocating a fixed percentage of your income towards savings and investments allows you to safeguard against lifestyle inflation and prioritize long-term financial security over short-term gratification.

In addition to its practical benefits, using percentages to guide your budgeting decisions also fosters a mindset of financial discipline and mindfulness. Consciously allocating your income towards different categories ensures that you become more aware of your spending habits and make intentional choices about where your money goes. This awareness enables you to make smarter financial decisions and align your spending habits with your priorities.

Tip 3: Start automated savings

Starting automated savings can be a game-changer in your journey towards financial security and wealth-building. Harnessing the power of technology to automate your savings enables you to effortlessly build a nest egg and achieve your financial goals over time. The best approach is to leverage technology to automate your savings and make it a habit. A straightforward way to do this is by setting up automatic transfers to your savings or investment accounts. For example, you can start investing by putting away as little as $100 per month. Setting up a recurring transfer will ensure that this amount will be automatically deducted from your bank account each month without you lifting a finger. Another option is to explore high-yield savings accounts, as these can offer higher interest rates than traditional savings accounts. By setting automatic deposits to such an account, you can contribute a fixed amount of money each month and grow your savings faster while earning interest on your deposits.

When automating your savings, it is important to follow the percentage example mentioned earlier. You can allocate a portion of your income towards savings and investments to ensure that you are prioritizing your long-term financial goals while still covering your essential expenses and discretionary spending. To ensure that your automated savings plan aligns with your financial goals, you can also consider setting up the transfers to occur a few days after your salary is credited. This ensures that you are saving consistently each month. It also reduces the temptation to spend the money before it is allocated towards savings. This can be a simple yet effective way to build wealth over time and achieve your financial goals with minimal effort.

SPONSORED WISERADVISOR

Tip 4: Ensure you are saving in the right investment vehicles

Ensuring you are saving in the right instruments can help you optimize your financial strategy. While setting a percentage of your income to save is essential, where you allocate those savings can significantly impact your long-term financial growth. Many people focus solely on the percentage without considering the potential growth and benefits of different savings vehicles. Here are some options to consider:

1. Individual Retirement Account (IRA)

An IRA is a tax-advantaged retirement savings account that allows you to save for retirement and also enjoy certain tax benefits. There are two main types of IRAs - Traditional IRAs and Roth IRAs. 

1. Traditional IRA: Contributions to a Traditional IRA are tax-deductible. So, you can reduce your taxable income for the year in which you make contributions. Additionally, your investments grow tax-deferred, meaning you will not pay taxes on earnings until you withdraw them in retirement.
2. Roth IRA: Contributions to a Roth IRA are made with after-tax dollars, so you will not receive an immediate tax deduction. However, qualified withdrawals in retirement, including earnings, are tax-free. This can be ideal if you expect to be in a higher tax bracket in retirement.

Contributing to an IRA can help you save for retirement while potentially reducing your taxable income in the current year. By taking advantage of the tax benefits offered by IRAs, you can maximize your savings and accelerate your progress towards your long-term financial goals. IRAs also offer a wide range of assets, including stocks, mutual funds, bonds, and Exchange-Traded Funds (ETFs). Diversifying your investments within your IRA can potentially increase your returns while managing risk.

2. 401(k) 

A 401(k) is an employer-sponsored retirement savings plan offered to employees by many companies. It allows employees to contribute a portion of their pre-tax salary to a retirement account, where it can grow tax-deferred until retirement.

1. Traditional 401(k): Contributions made to a traditional 401(k) are made with pre-tax dollars, so you can reduce your annual taxable income for the year in which you make contributions. Additionally, your investments grow tax-deferred until you withdraw them in retirement, at which point they are taxed as ordinary income.
   
2. Roth 401(k):Some employers offer a Roth 401(k) option, which allows you to make after-tax contributions to your retirement account. While contributions to a Roth 401(k) will not reduce your taxable income in the current year, qualified withdrawals in retirement, including earnings, are tax-free.

Contributing to a 401(k) can be an effective way to save for retirement while enjoying tax benefits and potentially employer-matching contributions. A lot of employers offer matching contributions to employees' 401(k) accounts, typically up to a certain percentage of the employee's salary. This is essentially free money and represents an immediate return on your investment, effectively increasing your savings without any additional effort. 401(k) plans also typically have higher contribution limits than an IRA. This allows you to save more money for retirement on a tax-advantaged basis. Maximizing your contributions to your 401(k) helps you accelerate your retirement savings and take advantage of the tax benefits offered by the plan. Moreover, contributions to a 401(k) are typically made through automatic payroll deductions, making it easy to save consistently without having to transfer funds manually. This automated saving feature helps you stay disciplined and ensures that you're consistently saving for retirement.

3. Health Savings Account (HSA)

A Health Savings Account (HSA) is a tax-advantaged savings account that you can use if you are enrolled in High-Deductible Health Plans (HDHPs). It allows you to save for qualified medical expenses on a pre-tax basis. Your contributions are tax-deductible, and your withdrawals for qualified medical expenses are tax-free.

1. Triple tax advantage: HSAs offer a unique triple tax advantage. Your contributions are tax-deductible, your earnings grow tax-free, and withdrawals used for qualified medical expenses are tax-free. This makes HSAs one of the most tax-efficient savings vehicles available.
2. Retirement savings:While HSAs are primarily used to cover current medical expenses, they can also serve as a valuable tool for saving for retirement. Once you turn 65, you can withdraw your money for any purpose without penalty, although non-medical withdrawals are subject to income tax. This flexibility makes HSAs a powerful vehicle for long-term savings and retirement planning.
3. Investment options:Many HSA providers offer the option to invest HSA funds in a variety of investment options, similar to an IRA or 401(k). Investing your HSA funds in growth-oriented investments enables you to potentially increase your savings over time and build a larger nest egg for retirement.

Saving in the right vehicles, such as IRAs, 401(k)s, and HSAs, are some of the best strategies to protect income from taxes. You can not only save for retirement but also potentially reduce your taxable income and enhance your ultimate savings amount. These tax-advantaged accounts offer a variety of benefits that can help you grow your wealth more efficiently and achieve your long-term financial goals. It is essential to consider your individual financial situation and goals when choosing the right savings vehicles for you. Consulting with a financial advisor can also provide guidance tailored to your needs and circumstances.

Tip 5: Look for ways to increase your income

Increasing your income is a powerful strategy for boosting your savings and accelerating your progress towards financial goals. It can help you with your distinct savings goals. One of the most straightforward ways to increase your income is by seeking salary raises at your current job. You can discuss your contributions to the company and make a case for why you deserve a raise. Highlight your achievements, skills, and any additional responsibilities you have taken on since your last raise. Be prepared to negotiate your salary based on market rates and your performance. Side hustles can also offer a flexible way to earn extra outside of your primary job. Freelance writing, graphic design, tutoring, or selling handmade crafts online are some of the countless opportunities to monetize your skills and interests.

You should also consider your talents, hobbies, and areas of expertise to identify potential side hustle opportunities based on your interests and schedule. Freelancing can be a lucrative way to supplement your income and expand your professional network. If you have specialized skills in areas like writing, graphic design, web development, or consulting, you can consider offering your services on freelance platforms like Upwork, Fiverr, or Freelancer. Freelancing allows you to set your own rates, work on projects that interest you, and potentially earn a higher income than you would in a traditional job.

Increasing your income not only provides you with more financial resources to save and invest but also enhances your overall financial stability and security. When you earn more money, you have a higher disposable income after covering your essential expenses. This surplus allows you to allocate a larger portion of your earnings towards savings without compromising your quality of life. With more money available, saving becomes a more manageable and less burdensome task. You are better equipped to cover your needs, wants, and savings goals without feeling financially stretched. This flexibility allows you to adjust your budget to allocate more funds towards savings, making it easier to achieve your desired savings percentage. 

To conclude

Saving 20% of your income is an achievable goal with careful planning, disciplined budgeting, and strategic financial decisions. Remember that while saving more than 20% of your income requires commitment and perseverance, the rewards are well worth the effort. Building a robust savings cushion provides financial security and peace of mind. It sets you on the path towards achieving your financial goals, such as buying a home, starting a business, or retiring comfortably. Make sure to stay focused on your savings objectives, track your progress, and regularly make adjustments to your financial plan as needed. This way, you can successfully save 20% of your income and set yourself up for a brighter financial future.

Use the free advisor match service to get matched with experienced financial advisors who can help you plan for your financial goals and save more than 20% of your annual income. Answer a few simple questions based on your financial needs, and the match tool can help connect you with 1 to 3 financial advisors who are best suited to help you.