One of the most common questions people ask when they start planning their future is how much they should save every month. When you start figuring out how much money you need to save, you need to do more than just save some money, you’ve got to set your goals in order to make them happen. Make sure to take some time to plan out your goals so that you know how much money you need to save to reach your goals.
Saving your monthly income doesn’t need to be complicated because the best to budget are often the simplest. The 50/30/20 rule is a straightforward budgeting method that can help you to manage your money effectively and tell you exactly how much to put towards your savings and your living costs each month. This rule helps you build more structure into your spending habits.
The basic rule of thumb of 50/30/20 rule is to divide your monthly income into three spending categories: needs (50%), wants (30%), and savings (20%).
50% of money on your needs
Your 50% needs are your monthly expenses that you cannot avoid and essential to the point that it would be difficult to live without.
Your basic needs include:
- Monthly rent
- Electricity and gas bills
- Transportation cost
- Insurances (for healthcare, car, or pets)
- Loan repayments
- Basic groceries
The basic need is different from person to person. If your basic needs exceed more than 50% of your income, you need to start making some changes in your life to bring down the expenses. This could mean finding new ways to spend money while grocery shopping and it could mean making life changes for less expenses living situations.
30% of money on your wants
After taking care of your basic needs, 30% of your income can be utilized to cover your wants. Your non-essential expenses are considered your wants, which are things that you could live without if you had to.
Your basic wants include:
- Dining out
- Clothes shopping
- Gym membership
- Entertainment subscriptions (Netflix, Spotify, Disney Plus)
If your monthly income is 3000 USD, you can spend 900 USD for you wants. If you find yourself spending too much on your wants, it’s about time you start thinking about what you could cut back on.
20% of money for your savings
After spending 50% of your monthly income on your needs and 30% on your wants, the remaining 20% is used towards saving your monthly income, or paying back any outstanding debts. Putting aside 20% of your monthly income helps build you a better and more durable savings plan. This durable saving plan will help you achieve your ultimate goal whether it be developing a long term financial plan, preparing for a down payment on a house, or building an emergency fund.
However, one must remember that following the 50/30/20 rule doesn’t mean that you would not be able to enjoy your life. Following this rule makes you more conscious about your money by finding areas in your budget where you are needlessly overspending.
Remember that saving your income is not a sprint but a marathon. If you regularly balance your expenses across these spending areas, you can spend your money more efficiently. With only three categories to track, you can save yourself the time and stress of managing every details of everything you spend.