Everyone needs savings. Whether you’re putting money aside to feel more secure, or you’re aiming for a specific purchase goal, savings are important to us all. But how much should you be saving, and how many accounts should you have? People tend to have different ideas, and, indeed, it generally depends on several factors. Age, goals, and lifestyle, are three of these. But no matter what your differences are, you can apply a very simple rule to calculate what percentage of income you should be saving; which is called the 50-30-20 savings rule.
The 50-30-20 Savings Rule
Do not cringe at the sight of these numbers and think this rule will be complicated. It’s very simple. The 50-30-20 rule clearly defines where your income should go. It breaks down like this:
● 50% for needs
● 30% for wants
● 20% for savings
These will now be explained in turn to give you a more detailed understanding of what costs and purchases would fall under each category.
50% For Needs
It may be tempting to look at your expenses and consider everything as a need. But you might want to be stricter with yourself when applying this formula. When we say needs, we are referring to things that nobody can live without. Housing is the main one. Be it rent, a mortgage, or room and board payments, having a place to live is crucial. Another need is having amenities in that housing. This includes water, power, and gas bills. Food to eat, clothes to wear, and transportation are also needs when used conservatively. However, dining out, designer clothes, and expensive sports cars would fall into our next category.
30% For Wants
This is the part where you need to be honest with yourself. These are the things that you might at first consider needs but look closer. Food is a need. Eating out at an expensive restaurant is not. Entertainment, socializing, hobbies, vacations are all luxuries you can survive without. But before you become distressed at this thought, look at the rule again. You can spend 30% of your income on these wants; you don’t need to give them up completely. But you do need to place them into the right category so you don’t overspend or compromise your needs and savings.
20% For Savings
If you stick to the above two parts of the rule, this one should be a breeze. Simply put aside whatever you have left after catering for your needs and wants, and you’re left with your savings. It’s a good idea to deposit your savings into an account that will earn you interest, as this can help your savings grow even faster. We offer just such an account here at Cashero with our high-yield savings account, which has an inflation beating APR of up to 5%.
Summary
Hopefully, this article has helped you learn more about the 50-30-20 rule. If you take the time to work out your budget carefully and stick to these three guidelines, you will soon find yourself managing your money effortlessly. And remember these percentages aren’t based on your income, so no matter what you earn, this rule can be adjusted to work for you.
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