There are so many “golden rules” to savings, it can be a little difficult for rookies to navigate, especially those who struggle with impulse control. From emergency savings to emergency spending, it can be a challenge to keep track of your money coming in and out.
But there is a really simple formula to spending that can help you stick to a budget, and it’s called the “50-30-20 rule”, or “Needs, Wants, and Savings". Sound like too much math for you? Don’t worry, the breakdown is far easier than you think. Let’s explore.
Step one: calculate your income after tax (also known as your net income). This is how much you make annually, minus federal and state taxes. Also, go ahead and subtract any deductions that are withdrawn automatically from your paycheck like healthcare, life insurance, or retirement
Step two: 50% of your income should go to needs. This is mortgage/rent payments, car payments, utilities, debt, and groceries. Basically, the stuff you can’t get away with not spending money on. Say goodbye to at least half of your paycheck to the necessities.
Step three: 30% of your income can go to wants. This is the stuff you like spending money on, like your streaming subscription services, gym memberships,going to see movies, restaurants, and travel. This is the fun stuff, but try not to let it creep past the 30% mark, or it will begin to eat into your savings…
Step four: 20% of your income should go into savings. This is where you will begin to grow your emergency fund, put money away for retirement or save up for debt repayment. The better you are at limiting your “fun” spending, the better your savings account will look. Also, yes, you should have a savings account that is separate from your checking account, so you’re less tempted to spend the money you should be putting away for rainy days.
What budget issues do you struggle with? Do you have some savings tips that could help others? Let us know!