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How much do we need to save?

>> Sunday, August 30, 2009

We are often told that saving is important. However, have we ever considered how much do we actually need to save.


Monthly required for basic needs of food, clothes, transportation, etc = $600 ($20 per day)
Basic need of shelter is an average 4 room HDB flat = $350,000 (split between 2 persons, 30 year HDB loan @ 2.6% interest), i.e. loan repayment of $500 per month per person.

An average worker who earns starting pay of $2,500 and has annual salary increment consistently of 2.5%.

Time frame:
Earns from Age 25 to 60 = 35 years
Spends from Age 25 to 85 = 60 years

Inflation per year = 3%
No investment growth of savings.


Future value of basic needs = FV(3% inflation, spends for 60 years, $(600*12) per year) = $1.2M
Future value of housing = FV(2.6% interest, 30 years loan, $(500*12) per year) = $0.3M

Future value of income = FV(2.5% increment, works for 35 years, $(2,500*12) annual income) = $1.6M

Therefore, Income = Expenses with a $0.1M safety margin.


Based on the above assumptions, an average person, staying in a 4 room HDB flat can only spend $600 per month while saving the remainder every month!

What about medical care, dependents, car, holidays, restaurant dining and our unlimited wants?




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