The 50-30-20 Budgeting Rule
Having some savings set aside is essential when managing money, as the past couple of years have shown us.
Despite the importance of saving money, data reveals that 45% of Americans have less than $1,000 in savings, which may not be enough in an emergency. Storing away a portion of each paycheck is essential to making sure you have enough money to cover the worst-case situation.
Savings can offer a lot more advantages than just financial security. Due to rising interest rates, you would be able to pay off high-interest debt like credit cards if you had more solid savings. Financial experts advise getting out of debt as quickly as possible in light of the unstable economic environment of today.
To begin with, having some money enables you to prevent incurring additional debt to pay for initial purchases. Additionally, you would have more freedom to experiment professionally and take more chances without having to worry as much about how your income might be damaged.
Now that we know it’s necessary to save money, the next question is how much should we be saving?
How Much you Should Save Every Paycheck
The general recommendation is to set aside 20% of each paycheck for savings. This relates to a common budgeting principle known as the 50-30-20 method, which states that you should set aside 20% of your income for savings and investments and 50% of your income for needs, wants, and savings.
This “gold standard” won’t apply to everyone or in every circumstance, according to Anderson Financial Strategies’ Shon Anderson, a licensed financial adviser. He also proposes an 80-20 split, whereby you dedicate 20% of your take-home pay to savings and the remaining 80% to spending on your necessities and wants. The 20% allocation is supposed to be constant regardless of the strategy.
It is reasonable to assume that under this most recent guideline, 80% covers all of your necessary expenses and leaves you with no extra money for wants. For example, the latest data from Redfin reveals that the average monthly price of rent in the U.S. is $2,016 as of June 2022. Given this high average, it stands to reason that an individual’s needs might easily exceed 80% of their income.
Whatever guideline you decide to abide by, make sure to strike a flexible balance between spending and saving. The key with each of these strategies, according to Anderson, is that saving 20% remains a top priority.
And if you’re unsure of how much of that 20% you ought to put into investments, it’s a good idea to set a goal of stashing three to six months’ worth of living expenses in your savings, which is also the amount that experts normally advise setting aside for an emergency fund.
If You Are Unable to Put Aside 20% of Each Paycheck
It may be tough for you to save a fifth of your income at times or under particular conditions, and that’s perfectly acceptable. There isn’t a single solution that applies to everyone, according to Delyanne Barros of Delyanne The Money Coach. In the previous example, if your basic expenses did account for 80% of your take-home pay, you might want to set aside some of the remaining 20% for discretionary spending rather than putting it all in savings.
The main objective, even if it’s just $20, is to make sure you’re saving some money from each paycheck. You can develop a saving habit and it will quickly come naturally to you if you set aside a small amount every time you get paid.
No matter how much you decide to save, it’s crucial to establish a regular saving schedule. By doing this, you will have already developed the muscle needed to increase your savings contributions when the time comes. Anderson continues, “Starting little and as soon as possible can make all the difference in your financial security.
By releasing part of your spending money, you can also strive to boost your savings. By downloading an app like Truebill that can cancel undesired subscriptions and negotiate bills on your behalf, you can make life easier for yourself. For more information, see Truebill’s complete review of Select.
Calculating How Much to Save
Beyond following the 20% rule of thumb and making sure you save at least a portion of every paycheck, Barros advises being clear about your savings goals because they may be more essential than your overall savings rate.
For instance, since you’re working toward a short-term, high-priority goal, you’ll need to be saving at a greater rate if you’re building together an emergency fund to last you a few months. However, Barros points out that if you’re in your 20s and saving for retirement, you can get away with saving between 10% and 15% of each salary if you want to retire by age 60.
Another recommendation from Barros is that you should save based more on your projected spending than on your present income.
For all of your saving needs, use a high-yield savings account After deciding how much money to save, decide where to deposit it. Your best option is a high-yield savings account online, which offers higher interest rates than a standard savings account at a brick-and-mortar bank. With a 2.07% annual percentage yield, or APY, KOHO currently delivers one of the highest returns on your money. Account users dont even need a big deposit to create their account; they are not required to maintain a minimum balance or pay monthly maintenance fees either.
Here’s The Deal
Building a strong cash reserve can provide you more flexibility in a pinch and give you some peace of mind knowing that you are prepared financially for everything life may throw at you.
While it’s generally accepted that 20% of every salary should be set aside for savings, apply the tips we provided above to guide your decision-making based on your unique financial situation. Starting with any amount is better than nothing and will help build the habit of saving money, which is actually the most important takeaway, whether you are able to save 20% or 5% of each payday.
