June 23, 2022
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Money Hacks

How much of your income should go to savings?

Read this if working out your savings plan is sending you into an existential crisis

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So you’re thinking about building savings. 

Working on your financial health? Love that for you!

Chances are you’re feeling slightly bewildered at this point, hence why you’ve taken to google. And that’s totally understandable since most of us are out here learning about money the hard way.

If you’re reading this and you’re like yeah, nah, I have ~no savings~ that’s cool baby! You can start anywhere. 

In fact, a small congratulations: it’s proven that our brains are wired to prefer maintaining our current patterns of behavior. It’s called the ‘status quo bias’, and it means we find it a lot easier to do nothing than to change.  

So even by looking into changing your saving habits, you’re already doing something. 

It’s super important to save for your own sense of security, creating a nice little cushion of savings. Because as you may already know, life comes at ya, and unexpected expenses can come out of nowhere. 

There are some basic formulas for working out how much you want to be saving that you can mold to your own unique lifestyle. Like a good bra.

We’ve covered it all below. 

How to start budgeting and saving money

Also like a good bra, there isn’t a one size fits all rule for saving. As in, we’re not going to tell you that everyone needs to be saving $700 a month. 

Say hello to the 20/30/50 ratio. What’s great about the 20/30/50 rule is that it works on the proportions of your income, however much that is for you. (If this already sounds unrealistic for you, dw - we talk about the alternatives to saving 20% a bit further down)

This is how it works:

📊 50% of your monthly income should go to your essentials, like rent and groceries. This is really basic ‘I need this to live’ stuff, like shelter, food, and health insurance (so Netflix doesn’t come into this category, sorry bruh)

📊30% of your income is for things you want, like Netflix, gym memberships, clothes, and beauty products. 

📊 and that leaves 20% of your income to be put aside for savings

Let’s say you earn $2,668 a month.

That’s $1,334 for essentials. 

$806 for wants.

$537 for savings. 

Obviously, this model isn’t for everyone. If you live somewhere with extremely high rent rates, or if your source of income is irregular, then maybe just see it as 20/80. This leaves room for if ‘essentials’ are a bit higher each month. 

Whatever the case, you should be aiming to save around 20% of your income each month.

Money hacks for reaching that 20% goal

Saving money into a Traditional IRA is a great way to hit the 20% goal because it’s tax-advantaged. As in, the money goes in before it’s been taxed. So your take-home pay will be a little lower, but not as low as it would have been if you set the money aside after paying tax. 

Some companies will even match what you save up to a certain amount in a 401k. So if you save 5% of your income and your company matches that ~boom~ you’re halfway there already.

We talk more about this in our Millionaire Retirement Plan, where we also look at the alternatives for meeting this 20% goal without an IRA or 401k, through personal savings alone. Check it out 🤘

What to do if 20% is too much 

If 20% sounds too much, and you’re literally living paycheck to paycheck - dw, you’re in the same boat as 64% of Americans. 

Sit down and look at what you spent last month. If you haven’t already, calculate your regular monthly ins and outs.  Work out what’s reasonable to you.  

Any amount, however small, is going to be helpful. Literally, $50 dollars a month is better than nothing. 

💵 Then, when you feel more in control, you can slowly increase this over time. We recently spoke to a 25-year-old on $34.5k who’s able to save $200 a month and gave him some advice on how to increase this. 

🏠 We discuss plenty of money hacks to cut down on expenses and nail your budget elsewhere on the blog, including how to save money on gas and rent

🍕If dining out is in your budget, we’ve also covered 6 money hacks for free food, everywhere kids eat for free, and where to get free food on your bday. 

You’ll also defo want to avoid overdraft fees. Consider opting out of your overdraft protection (which is str8 up bullshit anyways), and having your bank decline transactions when you run out of money. This might make you wince, but it’s better than entering a spiral of overdraft expenses 😥

Finally, just know that if you’re sick of scraping by to survive, it’s not a personal failure of yours but a reflection of our BS financial system. You’re doing the best you can. And we should eat the rich. JK. Or maybe not. 

Whatever the case -  you need savings goals, my dude

It’s a lot easier to save towards something specific than just saving for the sake of it. You need a purpose for your money that will actually motivate you to put it aside, rather than spend it. 

The first thing you should be aiming for is an emergency fund. Look, we don’t want to remind you of it, but that whole global event that rhymes with shmandemic really showed us how important savings are to our sense of security. 

🚨 You should aim for at least three to six months' worth of savings for an emergency fund 🚨

Other than that, savings goals differ depending on your age and circumstances. 

Debts obvi come into this, which differ depending on whatever beautiful season of life you’re in.  It’s up to you whether you factor debt payments into your ‘essential’ spending, or as part of the 20%, you set aside for savings.

If you’re really trying to kick your debt, some people prefer a 70/20/10 budgeting ratio. Here, 20% goes to savings and 10% goes towards paying off debts. 

If you are young and relatively debt-free, you ain’t off the hook, sorry. Now is the time to get into a rock-solid saving habit. Future you will thank you for it. 

To actually start saving, you need a few little tools: a budget, and a direct transfer

Okay, so now you have all the savings knowledge. It’s time to actually put it into practice. 

Luckily, we have a free money app that’s pretty helpful for this kind of thing (smoooth way to segue into a plug am I riiight) 

💙 First and foremost, Cleo can help you by automatically sorting your spending into categories. This includes essential and non-essential spending. 

Then you can go back and edit these categories yourself so they’re even more specific. You can also use this feature to audit any unnecessary subscriptions that are draining your outgoings. 

💙 You can set saving goals and spending limits, and Cleo will show you when you’re approaching this limit.

💙 CRUCIAL to effective saving: with Cleo, you can set up a direct deposit to transfer money into your savings account.

 It’s a LOT easier to save this way because it takes the choice away from you as to whether you’ll spend or save. It comes back to the ‘status quo bias’ we mentioned earlier, meaning that it's easier for our brains to maintain when savings are the norm, not an exception. 

💙 Finally, because Cleo’s not a regular money app, she’s a fun money app, she can roast you for your uncontrolled Amazon spending habits (if you want her to), and hype you for all the good you’re doing. You deserve it <3

Now go forth and get saving. You’ve got this 🤘

Enjoy this post? Def give it a share or send it along to a friend. You never know, it could make a big difference. And of course, if you want to try the best money app in the world for free, just hit this link right here.

Big love. Cleo 💙

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