50-30-20 Rule Of Savings You MUST Know About

As soon as the salary is credited, all of our thoughts turn to shop for those shoes, clothes, cosmetics, and other items; and saving money is the last thing on our minds. But, towards the end of the month, our pockets start to feel empty, and all we can think about is how we might have handled our money better throughout the entire month. If you can relate to this situation then this article is going to be of big help to you.

The first step to avoid the above situation is to start saving every month. Saving is the basic tenet of personal finance — it’s the building block of being a responsible adult. Saving money every month is something that you should always do.

How Much Should You Really Save Per Month?

If you are wondering how much should you save each month then you should adopt the experts approved 50-30-20 rule to save money.

This means you use 50% of your income for your necessities — rent, groceries, etc. 30% of your income can be used for your optional indulgences — shopping sprees and outings with your friends. You should try to save at least 20% of your income.

This, however, is just a guideline. It’s simply used as a rule of thumb in the world of personal finance.

How Did The 50-30-20 Rule Originate?

Well, as with most other things we accept as folklore, the 50-30-20 rule, too, came from a book. It was outlined in the 2005 bestseller All Your Worth: The Ultimate Lifetime Money Plan written by US Senator Elizabeth Warren and businesswoman Amelia Warren Tyagi.

The reason why the 50-30-20 rule seems much older sometimes is its simplicity. This very approach demystifies the intricacies of budgeting. It establishes the practice, not as something to be carried out by economists and finance professionals, but as something we need to incorporate into our lives organically.

How Can You Apply The 50-30-20 Rule?

Let’s consider some examples to understand this better.

STEP 1: Take Stock

NET FIGURES = MONTHLY SALARY - DEDUCTIONS

The first step is to take stock of your monthly salary. Try to work with net figures here to avoid involving tax complications. Your salary minus the income tax is what you have to work with.

STEP 2: Calculate Spending

The second step is to calculate how much you spend per month.

Make two separate lists for this — include all the essentials in one column and the discretionary spending in the other column. This can be difficult at first, but try to include everything, even your monthly Uber bills.

For example, your rent, groceries, and utilities will go into the essentials column. Sunday brunches and fancy meals will go into discretionary spending.

STEP 3: Evaluate And Adjust

If you’re spending less than the budgeted amount, you’re golden. But if you’re spending more (this is more likely), it’s time to cut back.

This does not have to be drastic. Remember, the best habits are the ones that fit into your life organically.

Start off small — reduce 5 night-outs to 3, for example. The more you reduce from the spending column, the higher the chances of meeting the 20% saving criteria.

EXPERT TIP:

When you budget out your month in the beginning, you’ll get a clear idea of how much you can spend. Take out a fixed percentage of your income as savings and keep it aside. Everything else that you are left with, is what you can spend.

What Should You Save For?

If you’re going to put off instantaneous gratification, there’s got to be a good reason for it.

No matter how old you are, where you are on the career ladder, or whether you have a family or not — there are some basics that you need to save for.

Emergencies

This is the cornerstone on which personal finance is based — you need to save for a rainy day. Emergencies don’t announce their arrival. It does not matter whether you’re going through a tough time or whether it’s the end of the month. Disaster can strike you at any time. You need to be prepared for when that happens.

Large Purchases

This can be as big as saving for a car or a house. It can also be a fund for a decked-out laptop you’ve been eyeing for a while. Being a responsible adult does not mean you can’t spend on yourself. It simply means you spend in a responsible manner. Save a little bit every month until you have enough to splurge.

Retirement

It is never too early to start saving for retirement. Old age is going to come for us all, best be prepared for it.

There are also certain benefits when you start saving for retirement early on. The power of compounding comes into play and it gets much easier to create a nest egg for yourself.

The bottom line, however, is that you need to save as much as possible every month. Whatever you save today, you can use later on in life.

How Can You Save More?

Let’s face facts — we all start the month off with the best of intentions, don’t we?

It is only as the month progresses and your bank balance starts dwindling that you realize you’re spending too much.

Not that anyone can blame you — with the never-ceasing inflation conspiring to steal your money and the unforeseen expenses that keep coming out of the woodwork, saving money is a challenge. It is even more difficult when left as an afterthought. It is much easier to save a certain amount every month if you can take it out of your main account right after you get your paycheck.

There are several ways to accomplish this.

1. Secondary Bank Account

The easiest way of keeping track of your savings is to simply transfer a fixed amount into a secondary bank account every month. You’ve got to keep it separate, and not spend from that account.

2. Recurring Deposit

This works like a fixed deposit — you essentially add a fixed amount every month and that money gets locked away until the investment matures. The disadvantage here is that it’ll be difficult to access that money even when you really require it. The advantage is that you’ll earn a healthy amount of interest on the invested amount.

3. SIPs

Systematic Investment Plans or SIPs are one of the easiest methods of saving money. This is an automated method where a fixed amount gets debited from your account every month and invested in an instrument of your choice — generally a mutual fund. This differs from a recurring deposit in the sense that you earn a higher return and you can also access your income for dire emergencies. The flip side is that it is riskier than a recurring deposit.

There are a million more methods that you can use to automate your savings. With the fin-tech boom on the rise, more and more apps are coming up every day, which can help you out in this regard.