If you’re one of those people who continuously checks their savings account, this article about saving—and how much you should be saving—will be helpful. It’s not uncommon to get sweaty palms right before paying rent, phone bills, and car and health insurance toward the end of the month. But, if we all got better at saving, maybe that problem wouldn’t exist, right? How much you should be saving isn’t a one-number answer. There are many factors that go into calculating the total. So strap in, because who doesn’t love a little math problem?
The 50/30/20 Rule
When it comes to saving, the 50/30/20 rule is an effective method to consider. What do these numbers mean? Let’s break it down. Fifty percent of income goes toward necessities, including rent, gas, groceries—you know the drill. Thirty percent goes toward discretionary items (that’s up to you to decide), and 20 percent goes toward savings. Simple, right?
The next thing to consider is your goals. What are you saving up for, and what is the timeframe? If you’re saving for a short-terms goal, say an exotic trip to Tahiti or buying your boyfriend a new set of golf clubs for Christmas, your savings plan should cover less than one year. Even saving up for tax season could be the goal.
You may be saving up for something slightly more long-term, within the next ten years. Some examples include replacing a broken dishwasher, covering a major insurance deductible, or paying off student loans.
The biggest savings plan, however, deals with retirement, which is certainly a long-term goal. Let’s get back to the numbers: consider saving between 10-15% of income for retirement. This is where a 401(k) plan comes in handy, and it would be helpful to ask if your company offers one.
Of course, there will always be unexpected circumstances that may hinder progress when trying to build up your savings account: you may encounter family emergencies, your car could break down, or a water pipe could break. For moments like these, establish an emergency fund that can cover three to nine months of your living expenses.
The "What-If" Game
Don’t know where to start? First, calculate your cost of living and play the “What If” game. “What if I lost my job?” OK, say that happens; you’ll have to make sacrifices and cut down on luxury expenses (cable, fancy manicures, boozy brunches, etc.). Think about how much money is needed to actually survive—as in, feed yourself and keep a roof over your head. Basic human needs. Next, divide that number in half—can you save this amount monthly? If so, you’ll build a six-month emergency fund within the next year.
If all of the above sounds like a bunch of boring, adulting mumbo jumbo, the 50/30/20 rule should be your key takeaway. Also, remember that if you want to retire (and let’s face it, who doesn’t?), you should consider putting 10-15% of your income towards that life-long goal.
See, that wasn’t such a complicated math problem. Class dismissed.