Diana Clement: The magic number you need to save to live comfortably

You should be putting away at least 10 per cent of what you earn. Photo / 123RF

OPINION:

What's the magic number you need to save to be comfortably off through life? I'd argue it's 10 per cent of all you earn from your very first paper round or job in hospitality.

That 10 per cent is the absolute minimum. Some would say 20 per cent.

Rules of thumb like this help people who can't or don't want to budget down to the last cent to ensure they have sufficient money for their needs. Most people cross their fingers that whatever they're putting away is going to cover needs as they arise, which can be anything from buying a house to an operation they can't get through the public health system.

The magic 10 per cent will ensure you can live within your means, all going well, and survive the curveballs life throws at you - although some insurance would help with that.

There is a misconception that the KiwiSaver default rate is 3 per cent because that's what we need to save to be comfortably off in retirement. The figures were set because that was what it was believed New Zealanders could afford to spare from their pay. It's just not enough in reality.

Savers can increase their KiwiSaver contribution to 4 per cent, 6 per cent, 8 per cent or 10 per cent. By the end of May this year, 67,463 people had decided to contribute at that 10 per cent rate, which amounted to 5.05 per cent of all employees paying in.

Consider that 10 per cent as tithing to yourself. The word tithe refers to a one-tenth part of your income (or produce) that historically was pledged to religious organisations or compulsory tax to government. Make it a tax to yourself.

KiwiSaver is not the only way to save your 10 per cent. You might choose to stick with the 3 per cent contribution matched by your employer and invest the rest elsewhere. Just don't put it all aside as short-term savings for consumer goods, travel and hedonistic pleasures. That's cheating the system and also yourself. Medium-term savings are also important.

Some of that 10 per cent might be directed into an investment property. More and more New Zealanders are choosing to invest on the side in shares or even cryptocurrency. That's also fine, so long as you're not investing more than you can afford to lose and you don't think that you know more than the experts.

There are people in New Zealand who just can't save a cent. A far greater swathe of the population could save with the help of a budget. When you budget, a lot of erstwhile "essentials" become luxuries.

With a budget, you can "pay yourself first". That means setting up your bank accounts to put your 10 per cent into savings at the beginning of the month and then budget around the remaining money. This concentrates the mind on what's essential and what's not.

Believe it or not, some people save considerably more than 10 per cent. I'm sure the people who have chosen 10 per cent KiwiSaver savings are financially literate and will in many cases have money going into short-term savings as well to pay for things like holidays and replacing the dishwasher when it dies.

You could put money into an investment property. Photo / NZME

There is an argument that 10 per cent isn't enough. I've written about the 50/30/20 rule before. It's a common rule where 50 per cent of income should go to needs, 30 per cent to wants, and 20 per cent to savings.

Personal finance comes with plenty of other "magic numbers" and shortcuts if you don't like spreadsheets. The final one I'll leave you is the rule that says you need to save 25 times the amount you plan to spend annually in retirement.

Take your annual retirement budget, deduct NZ Super from that, then multiply your figure by 25. This is the lump sum you need to save for retirement. Remember that some costs go down in retirement, and some such as entertainment and travel can go up in the early retirement years and medical care costs later.