There’s a popular budget strategy called the 50-30-20 rule. It recommends that you allocate 50% of your paycheck to essential expenses (needs), 30% to non-essential expenses (wants), and 20% to savings and investments. The concept is sound, but it doesn’t always account for unexpected expenses. In those instances, emergency loans may be available for those who need help covering unforeseen expenses.
The 50-30-20 rule may not be the best strategy for everyone because some may find it difficult to cover their essential expenses and have enough left over for savings or investments. So how can you know how much to save each month?
How to create a sensible budget
Creating a budget comes down to using some math. Add up your sources of income then add up all your expenses. Subtract the expenses from the income, and what’s left over is what you can save or invest. The trick is to ensure all expenses are included, not just the major ones. That includes spending money and recreational expenses like movies or takeout food.
The “sensible” part of this comes into play when you separate expenses as “essential” or “non-essential.” Rent or mortgage payments, utility bills, insurance, and groceries are essential. Takeout food and premium cable TV packages are not. After reviewing your list and eliminating unnecessary expenses you may be able to create some savings bandwidth.
Budgets are not just an exercise where you’re putting numbers on paper. They work best when you stick to them and commit to the changes you want to make. Keep that in mind when you choose to eliminate takeout food or live without a TV/movie streaming service. If you can’t follow through on those pledges, keep them in your budget. This way you can have an honest and more accurate assessment of what you’re spending.
Find a savings percentage to fit your financial situation
Check to see if your new budget fits the 50-30-20 rule. The sum of your essential expenses should be at or below 50% of your income, and non-essential expenses should add up to no more than 30% of your income. That leaves 20% left over to save or invest. If that’s not the case, save whatever makes sense for you. Something is better than nothing.
Some people prefer to save fixed amounts–maybe $10 to $20 per week–instead of a percentage, and you may be able to help your savings grow even faster by putting it in an interest-bearing savings account. Banks and credit unions including many online banks, offer different kinds of savings accounts, with competitive rates and even high rates, depending on how much is deposited in the account.
The final factor to look at here is whether to “save” or “invest.” Investing can produce higher returns, but it may be harder to get your money out if you need it. For example, depositing money into a time deposit like a certificate of deposit (CD) or buying savings bonds with long maturity dates. It might be better to first build an “emergency fund” in a savings account where you can more easily withdraw cash for an unexpected event. That can help eliminate the need for emergency loans when the unexpected occurs.
The Bottom Line
Using the 50-30-20 rule to determine what you’ll save from each paycheck is a nice idea, but the numbers may not always work for everyone. You may find it best to start by creating a sensible budget, eliminating non-essential expenses, and saving what you’re capable of. Use that strategy to start building an emergency fund in a traditional savings account first, then as your savings grow, focus on making some investments that may yield a return.
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