All of us want to build up our savings as much as possible. But for most of us, life and everyday expenses tend to get in the way, preventing us from setting as much money aside as we’d like to.
With some financial self-discipline and willpower, though, nearly anyone can start saving and build up funds for an emergency, retirement, college, a big future purchase or investment, or anything else we’d like to be able to comfortably afford without borrowing (or with as little borrowing as possible, anyway) someday.
But just how much should we be saving? Read on for some guidance commonly provided by financial experts regarding how much beginning budgeters and longtime savers alike should be setting aside.
The 50-30-20 rule
A rule of thumb regularly suggested by financial advisors and budgeting experts, the 50-30-20 rule works by segmenting your income into three key categories — living expenses, discretionary spending and savings/investments. And for those who are following the rule, it can make saving relatively simple by forgoing a long list of budgetary line items for dozens of different expenses. Instead, the 50-30-20 rule breaks financial allotments into:
- Living expenses — 50%: This category represents your household necessities, including essentials such as the rent or mortgage; healthcare; childcare; household repairs and maintenance; groceries; insurance; transportation expenses such as a car payment, bus and train fares, fuel for any family vehicles, etc.; and utilities such as power, water, internet service, phone service, etc.
- Discretionary spending — 30%: This category includes the things members of your household might want but don’t necessarily need — what might be considered “fun money.” It encompasses non-vital spending such as that devoted to entertainment, vacations, dining out, cable television, online subscriptions, gym memberships, and shopping for things like clothing, hobbies and furniture that go beyond your basic needs.
- Savings and investments — 20%: This final category covers funds that you put away for the future (often in a savings account or money market account) and devote to meeting your financial goals. It includes any money used to pay down debts, as well as funds allotted to savings. The types of savings covered here can include emergency funds, retirement accounts, educational savings, savings for a significant future purchase such as a home or a vehicle, and investments such as stocks, bonds, mutual funds and certificates of deposit (CDs).
Of course, to get started with implementing the 50-30-20 rule, it’s important to have a firm grasp of your current financial situation, including your income, your debts, your monthly expenses, etc. Creating a household budget can help you develop a better understanding of where you stand on all of these fronts, along with how much you can devote to savings and investments.
Further, financial realities may force you to deviate from following the 50-30-20 rule on occasion, as unexpected expenses such as auto repairs, healthcare bills and home repairs are an unavoidable part of life and will arise from time to time. But by trying to consistently stick to the 50-30-20 rule from month to month, you can set a foundation for saving and make it a habit over time.
Age-based recommendations
While for most of us the 50-30-20 rule can serve as a good guideline for how much to spend vs. how much to save each month, there’s no universal answer to how much every person should set aside. The right tactics can vary greatly depending on personal goals and financial situations. But there are some financial goals and benchmarks that most financial experts agree are good fits for people of varying age groups to shoot for.
Consider this financial road map that offers recommendations on money-related objectives and areas of focus for savers in their 20s, 30s, 40s, 50s and beyond:
- 20s: Experts recommend that young adults in their 20s focus on building their credit, paying down any debts they may have accumulated, and devoting as much money as possible to savings and investments each month. For those who can’t devote a full 20% of their income to savings and investments in their 20s (as the 50-30-20 rule suggests), smaller amounts can still add up — especially when considering the power that compound interest can contribute to building up retirement savings, for example, over time. Try to shoot for devoting at least 10% of your income to savings and/or investments, if not more.
- 30s: Financial professionals suggest that people in their 30s should continue to focus on paying down non-mortgage debt, plus try to devote more money to their savings, especially if they aspire to start a new family, buy their own home, make home renovations or improvements soon, etc. Individuals in this group should try to devote at least 15% of their income to savings and/or investments, if not more.
- 40s: Those in their 40s should continue to increase the share of their income they devote to savings and investments, financial experts say, as well as focus on getting their credit card debts under control. By this time, according to financial professionals, savers should aim to be putting away at least 20% of their income, plus shoot for having their savings balance at a level that’s equal to or greater than their current annual salary.
- 50s and beyond: By the time you hit your 50s and older, according to financial professionals, you should be aiming to pay off your mortgage and maximize contributions to your retirement account. At this stage in life, financial experts say, a good rule of thumb is to have two times your current annual salary (or more) set aside in savings and investments.
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