In order to achieve one’s dreams of owning a house, buying a car, or travelling abroad, it is imperative to carry out a certain amount of financial planning. In order to do so, one can save a stipulated percentage of their monthly income – this will not only allow an individual to buy whatever they want later on but also prove to be indispensable during emergency situations. However, how much of your salary should you save per month? A popular method stems from the ideas of American Senator, Elizabeth Warren, known as the 50/30/20 rule. What does this entail? Let’s find out.
The 50/30/20 Rule
As per this rule:
50% of your income must be dedicated to your needs, which entail items that are absolutely necessary for your existence, such as food, rent, electricity, clothing, etc.
30% should be granted to your wants or desires, which entail non-essential items that are deemed as a luxury, such as expensive outings, local tours, gaming consoles, etc.
20% of your salary should be put into your savings.
Moreover, 20% of your savings can be split between retirement savings, emergency funds, and investments, including mutual funds and stock market investments. Savings can also be used for the purpose of debt repayment, in the event wherein an individual applies for a fast cash loan or a short term personal loan. However, it is important to keep in mind that the 50/30/20 rule is not applicable to all individuals and circumstances. In certain scenarios, an individual’s salary might be too low to be able to accommodate this rule or their financial goals might warrant saving more.
How Can You Go About Retirement Savings?
As a rule of thumb, one must put away 10% of their monthly savings for retirement purposes. As every individual needs to save up for their retirement, it is essential to have a backup plan during old age, especially in the midst of health problems and mounting expenses. Hence, saving up for retirement is a must.
While 10% of your income is a good idea for youngsters who have just started earning, it is a good idea to increase the savings percentage with time. If you start saving late, you will be able to attribute a major part of your income towards your retirement savings. You could also use your savings to invest in long-term mutual funds. Alternately, you could also save up to the extent wherein you have 20x of your annual salary saved up by the time you retire. This proves to be a more comprehensive approach than the 10% method.
How Can You Save Up for an Emergency Fund?
You should have enough money saved in your emergency fund so that it can suffice for at least 3-9 months during contingency situations. This fund should also be able to cover your basic living expenses during this time period, including food, rent, medical bills, and the like. Emergency funds come in handy in scenarios wherein an individual is unemployed, in case of which, one wouldn’t necessarily indulge in luxuries such as dining out or going for a movie. This kind of saving will also help you survive in scenarios wherein you do not have a steady flow of cash. In case you are unable to save up enough for an emergency fund, you can always avail a fast cash loan, provided that you will be able to repay the same on time.
To conclude, figure out what works best for you and calculate your savings as per your expenses each month. It might not be possible to save a consistent and fixed amount every month, but that’s okay, as such fluctuations are a part of life. Try saving up enough for your retirement and in the event of an emergency, and you are good-to-go in terms of financial planning. The rest can be only be dictated by the sands of time.