If you've ever found yourself wondering, "How much should I save?", you're not alone. Financial planning can seem like a daunting (and boring) task, especially if you're just starting out on your own financial journey. But don’t worry, we've got an easy-to-follow budgeting strategy for you: the 50/30/20 rule.
Breaking Down the 50/30/20 Rule
The 50/30/20 rule is a pretty straightforward guideline to managing your finances.
Here's how it breaks down:
- 50% of your income goes to essential expenses, such as rent, utilities, groceries, transportation, and health insurance (the boring stuff basically).
- 30% of your income is allocated to discretionary expenses. This is your 'wants' category, including dining out, entertainment, gym memberships, travel, and the odd takeaway. 👀
- 20% of your income should be saved or used to pay off debt. This is your future-focused money, paving the way towards a brighter financial future. 🌞
Understanding Essentials: The 50% Category
This portion of your budget is dedicated to life's non-negotiables. These are things you must pay for to maintain your current lifestyle. For example: rent or mortgage, groceries, utilities, healthcare, transportation costs, and minimum debt repayments.
And if you're wondering, "How much should I save if my essentials take up more than 50% of my income?" then it's time to consider reducing some of these costs. Can you downsize your living arrangement or negotiate lower rates on your bills? Dig out your creative and flexible side; remember, this is all about ensuring your financial well-being.
Looking for some tips on how to reduce your recurring bills? Here's Cleo's guide on How to Negotiate Your Bills. 💡
Navigating Discretionary Spending: The 30% Category
This category is all about balance and enjoyment. Life is about experiences and making memories.
That being said, it's also essential to balance our present desires with our future financial goals. That's why you should try and stick to 30% of your income for your discretionary spending.
Sometimes it might be helpful to sit back for a minute and think "How much should I save for the things I want?" If your wants start pushing you over that 30% allocation, it might be time to reassess and prioritize.
Prioritizing Savings: The 20% Category
You should try to save at least 20% of your income. This is gonna set you up for the future and help build that emergency fund for when an unexpected expense hits. This includes contributions to your savings account, retirement funds, emergency fund, and extra payments on any outstanding debts.
Always try to pay your debts off first to avoid those pesky interest charges. 🏦
It may seem challenging to save this much initially, especially if you're dealing with student loans or other debts. But the 50/30/20 rule is a guideline. If 20% seems unachievable right now, aim for a lower percentage and gradually increase it as your income grows or your expenses decrease.
Making the 50/30/20 Rule Work for You
So, now that you know "how much should I save", it's time to put this plan into action, baby.
Start by tracking your income and expenses. There are several great apps available that can help with this – gone are the days where you have to budget and track your spending in an Excel spreadsheet. ❌
Once you have a clear picture of your income and spending habits, allocate your after-tax income into the three categories based on the 50/30/20 rule. Remember, this isn’t about perfection; it’s about progress. You may need to tweak these percentages based on your individual circumstances.
✨ Want an AI money app to do it for you? ✨
Setting a budget with Cleo is easy and she won't cost you a dime.
How to get started:
1) Get connected 🤝 – Download Cleo, sign up, and connect your checking account.
2) Income 💸 – Select your latest paycheck(s) so Cleo knows when you get paid.
3) Bills 👀 – Add your bills and double-check to see if they’re right so they can be tracked correctly
4) Spend limit 🥡 – Set a realistic spend limit.
Each month, she'll give you a clear breakdown and show you how much money you’ve got coming in vs. how much money you’ve got going out. She'll also alert you when your bills are due and how much you’re spending on certain categories including:
🏦 Bank charges (you totally suck)
Interested? We thought so. Here's How to Make a Budget With Cleo.
Here's to Financial Freedom
The 50/30/20 rule is an effective guideline, but it is just that—a guideline. Everyone's financial situation is unique, and what works for one person may not work for another. You may need to make adjustments to these percentages so they better suit your circumstances.
And remember, your finances shouldn’t be a source of stress. Instead, think of it as a journey to financial freedom. A journey that will give you the confidence to enjoy your present, while also preparing for a secure and comfortable future.
Your future self will thank you. 💗
Enjoy this post? Def give it a share or send it along to a friend. You never know, it could make a big difference.
Big love. Cleo 💙