How Much Should I Save Each Month? 50/30/20 Principle Explained

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When you want to start saving some of your hard-earned cash, the first place to start is to figure out how much you can actually save.

This can be a hard-learned lesson. Navigating the world of personal finance can sometimes feel like a maze. However, with some guidance and a good framework, you can set yourself on a path to financial well-being.

Enter the 50/30/20 rule. But what exactly is this principle, and how can it guide you in deciding how much to save each month?

A realistic goal makes saving far more attainable, creating a clear focused plan to help you achieve your savings goal in a reasonable time.

How Much Should I Save Each Month?

Generally speaking, aiming to save 20% of your income each month is considered to be a fair and reasonable savings goal for most individuals. However, the actual figure itself will be dependent on your individual circumstances.

What is the 50/30/20 Method?

The 50/30/20 rule divides your after-tax income into three key categories:

1. Needs (50%): This encompasses essentials such as housing, utilities, groceries, and transportation.
2. Wants (30%): These are your luxuries, think dining out, entertainment, and vacations.
3. Savings (20%): This portion of your income should be directed towards savings or debt repayments.

What If My Needs Are More Than 50%?

In cities with a high cost of living or if you’re managing significant debts, your essentials might surpass 50% of your income. Here’s how to tackle that:

1. Prioritize expenses: Do you really need that premium cable package?
2. Boost your income: Side gigs or freelance opportunities can make a difference.
3. Seek professional advice: Financial advisors can offer tailored guidance for complex situations.

Where to Put Your Savings

Once you’ve earmarked 20% of your income for savings, the next step is allocation. Our Savings Forecast Tool can project potential savings growth over time. In general, consider these avenues:

1. Emergency fund: Aim for 3-6 months of living expenses.
2. Retirement accounts: Max out contributions to your 401(k) or IRA.
3. High-yield savings account: Enjoy better interest rates than traditional accounts.
4. Investments: Think stocks, bonds, or real estate.

Ways to Boost Your Savings

Maximizing your savings potential requires a combination of smart strategies and disciplined habits. If you’re committed to increasing the 20% you set aside for savings, consider these enhanced and practical tactics:

1. Automate: Simplify your savings process (a budgeting app like Mint can be game-changing here). Set up automatic transfers from your checking to savings accounts immediately after payday. By doing this, you essentially treat your savings like any other bill – one that pays your future self.
2. Cut Costs:
   • Review and Reduce: Regularly audit your monthly expenses. Can you switch to a more affordable mobile plan? Do you really watch all those cable channels?
   • Bundle Services: Some providers offer discounts if you bundle services like internet, phone, and cable.
   • Energy Efficiency: Invest in energy-efficient appliances, which can cut down your utility bills in the long run.
     
3. Shop Smart:
   • Cashback and Rewards: Use credit cards that offer cash back or rewards on purchases.
   • Discount Days: Make the most of sales and discounts. Shopping during holiday sales or end-of-season sales can lead to significant savings.
   • Bulk Buy: Purchase non-perishable items in bulk. Over time, this can be much cheaper than buying single units.
     
4. Increase Your Income:
   • Freelance or Side Hustles: Use your skills or hobbies to earn on the side. Platforms like Upwork, Fiverr, or Etsy can be great places to start.
   • Invest in Yourself: Attend courses or workshops that can enhance your professional skills, making you eligible for raises or better-paying jobs.
     
5. Limit Luxuries: It doesn’t mean cutting out all fun. Maybe alternate between dining out and cooking special meals at home, or choose local vacations (staycations) over expensive overseas trips occasionally.
   
6. Tax Efficient Investing: Make the most of tax-advantaged accounts like IRAs and 401(k)s. Your money can grow faster when it’s shielded from annual taxes.
   
7. Negotiate More: This isn’t just for salaries. Try negotiating rates with your service providers – from your gym to your internet company.
   
8. Enhance Your Financial Knowledge: The more informed you are, the better decisions you’ll make. Read finance books, follow financial news, or join investment clubs. Consider our curated list of top financial books for 2023.
   
9. Group Savings: Participate in group saving or investment clubs, which can offer both accountability and a way to learn from others.
   
10. Review and Adjust: Periodically review your savings and investment strategies. Markets, life situations, and goals change; ensure your approach remains relevant and effective.

Conclusion

The 50/30/20 rule, though a simple guideline, can be a transformative tool with the right resources at your disposal. Explore, engage, and educate yourself with our comprehensive suite of tools and insights.

Here’s to achieving financial success, no matter where you’re starting from!