It seems like every financial conversation we have comes down to one thing: how much money we have saved. Whenever we seek financial advice from someone or think about our current financial state, it all boils down to how much we have managed to put away for the future. But exactly how much of our weekly paychecks and yearly income should we be saving to make sure we have a safe and secure financial future?
Unfortunately, there is no simple answer to this question. Most people are familiar with the 50/30/20 rule. This dictates that 50 percent of our income (after taxes, that is) should go toward expenses that we need to live. 30 percent should go to discretionary spending that isn’t essential but helps make our lives enjoyable. And the final 20 percent should be saved for the future. The problem is that the 50/30/20 isn’t universally viable for everyone and isn’t feasible for everyone. With that being said, let’s try to understand the art of saving money based on this mythical figure of 20 percent.
Why 20 Percent?
First of all, it’s important to understand why 20 percent is considered the target figure for saving money. In theory, saving 20 percent of your income will allow you to maintain your current lifestyle and financial independence when you reach retirement age. In a vacuum, this would probably work out as planned. However, people don’t live in a vacuum. They have different lifestyles and different living costs. They are rarely able to save money at the same rate their entire lives or start saving at the same time.
The fact is that every person is different. Their lives have different variables to take into account when it comes to saving money and having enough to cover both unexpected costs and the cost of living when they stop working full time. If you take away one thing from our discussion of saving money, it should be that your case will be unique. What works for someone else may not apply to you. Nevertheless, the 20 percent figure can be a good figure to keep in mind so that you have a reference point when it comes to how much you’re saving.
Set yourself up for saving
In a perfect world, you will start saving money from the time you get your first paycheck and continue to save until you retire. However, you need stable financial ground before you start thinking about your future savings. In most cases, this means eliminating debt. Obviously, if you have a mortgage or car payments, these are long-term debts that you can count toward the 50 percent of your income that goes to living expenses. But you need to do your best to eliminate other types of debt, specifically credit card debt, as well as student debt.
Even if you have found a way to put aside 20 percent of your income, it doesn’t mean as much if you have credit card debt – or you’re paying only the minimum on your student loans. With these kinds of debts, it’s easy for interest to pile up, costing you more in the long run and negating some of that 20 percent you’ve managed to save. You shouldn’t worry about saving 20 percent of your income until you’ve managed to pay down most of your debt.
Get there gradually
For most people, saving 20 percent of every paycheck is unrealistic. It can be just as unrealistic for people in their 20s as it is for people in their 40s. After all, reports from January 2019 indicate that 78 percent of Americans live paycheck to paycheck. It will do you know good to throw up your hands and give up because you can’t afford to set aside 20 percent of your income.
Instead, start small and work your way to that figure. First, try saving 5 percent of your paycheck, which should be reasonable, even for those living paycheck to paycheck. Once you grow comfortable with that figure, try saving 10 percent. Eventually, try to make it all the way to 20 percent. Also, don’t think that making it to 20 percent should be your end game. If you’re at 20 percent and still living comfortably, don’t be afraid to continue to increase that amount if you’re able to do so.
Know what counts
It’s important to keep in mind that there is more than one way to save. For instance, if your employer puts money into a 401(K) for you, that money counts toward the 20 percent in your savings. For those lucky enough to have an employer who matches 401(K) contributions, always do your best to maximize your contributions. If not, look into setting up a traditional IRA. That way, part of your savings goes to your IRA and part goes into a savings account, helping you to strive for that 20 percent figure on multiple fronts.
Know every little bit matters
Perhaps more than anything, it’s important not to become frustrated if you’re not able to save as much as you like or as much as you think you need to. Always remember that anything you put toward your savings should be looked at as a positive. This is why you need to remember that 20 percent is a vague reference point and not something that you should look at mandatory. All you can ask of yourself is that you’re saving what you can. Every little bit you can save now will matter later on in life, and you should never lose sight of that or get discouraged if you’re below the 20 percent threshold.
Ways to increase savings
No matter where you are in relation to the 20 percent figure, there are always ways to increase the amount of money you’re able to save. In addition to cutting down on your debt, as mentioned earlier, look for ways to reduce living costs. This doesn’t mean you need to live uncomfortably or have no margin for error in your budget. Rather, look at the 30 percent or so of your income that’s going to discretionary spending and look for ways to cut back. However, this doesn’t mean you shouldn’t treat yourself to things you enjoy, but maybe don’t do it every day.
You can also look into direct deposits and automatic transfers to help boost your savings. For instance, if you have a direct deposit on your paycheck, set it up for some to go into your checking account and some into your savings account. It doesn’t have to be split evenly, but it ensures that part of every paycheck goes into your savings. You could also set up an automatic transfer from your checking to your savings every month. This way, you won’t have to remember to save; it’ll happen automatically. Even if it’s only a small amount that’s going into your savings account automatically, every little bit counts.
Finally, it’s important to stay ambitious financially. Don’t be afraid to pursue promotions or keep an eye out for other jobs that pay more. You should also consider part-time jobs or side hustles, especially if it involves doing something you enjoy. The more income you have, the easier it’ll be to set a higher percentage aside for the future. This doesn’t mean to work yourself ragged or make yourself miserable, but you might be surprised to find that there’s a little extra money to be made doing something you enjoy.
Don’t overthink, just save
In the end, all you can do is save as much as possible – that’s within reason for your lifestyle and financial situation. Don’t get caught up in thinking that the 50/30/20 rule is gospel. Remember, 50/30/20 is just an idea, it’s not going to fit everyone. Your financial situation is unique to you, and you shouldn’t cause yourself undue stress just because the 50/30/20 rule doesn’t fit you like a glove. At most, saving 20 percent of your income is a reference point and nothing more. Ultimately, trust yourself to save as much as you can, but always make financial decisions based on your own situation, not a rule that someone made up.