What is an ideal savings rate?

Socio-Economic Research Centre executive director Lee Heng Guie (pic) said that setting a strict amount to save could be difficult and would usually depend on a person’s financial commitments.

THE unprecedented Covid-19 pandemic has got many people into the habit of saving even more money to prepare for any worsening of the economy, according to recent banking statistics.

But the pertinent question here is how much is an ideal savings rate that one can realistically adopt in the current circumstances.

Socio-Economic Research Centre executive director Lee Heng Guie said that setting a strict amount to save could be difficult and would usually depend on a person’s financial commitments.

“A good ballpark figure would be about 30% of one’s income. But I know of people who save more than this. Our savings rate, especially in Asian countries, has traditionally been very high and these excess liquidity usually goes to development projects for the future, ” Lee told StarBiz.

“Admittedly, it is quite difficult to save money due to the rising cost of living. One would also have to question the purpose of the saving: is it for contingency or precautionary steps? Or some may actually save for house downpayment, ” he added.

Lee said the aim is for an individual to not be too overleveraged although some form of leverage is acceptable into assets that would grow in value over time. “An asset value that grows won’t have an impact on a person’s personal balance sheets.”

Meanwhile, financial advisory firm Excellentte Consultancy’s Jeremy Tan told StarBiz that there is no ideal savings rate out of a person’s income but it would depend on the person’s requirement.

“It depends very much on the current budget or expenditure of the individual or family. In normal times, it is recommended one should save at least 10% of one’s monthly personal income, ” Tan said.

“But with the current situation, it would be good to re-look at the expense items in one’s budget to see which ones are not essential so as to increase savings, ” he added.

Tan said it is recommended for an individual to have at least three to six months of expenditure or income saved for a rainy day.

“For businesses, the recommended amount of monies to be set aside is at least six to 12 months of expenditure or income. The income yard stick will be a better option, ” he said.

Tan said people should find ways to increase income or reduce expenditures.

“These are unprecedented times, especially in view of the current pandemic with so much uncertainty going forward. So the immediate response is to spend less and save more, ” he said.

According to recent Bank Negara data, savings by individuals in ordinary savings accounts rose month-on-month by RM6.37bil in March to RM170.03bil. The amount saved jumped further in April by RM9.57bil to RM179.6bil.

Meanwhile, the amount saved in April 2020 was 17% higher compared with the same month in the previous year.

The data revealed that savings deposits in commercial and Islamic banks under the category “individuals” rose to RM179.6bil in April, compared with RM153.3bil in April last year.