When you really need them, savings can be a friend indeed. With a nest egg of funds built over time, you are better prepared for emergencies and can easily reach a variety of financial goals – like putting a down payment on a new home, taking a vacation or even entering retirement securely. When times are tight, such as during an economic downturn, having solid savings is especially important, helping you to weather unexpected financial obstacles, such as loss of income or depreciation of assets.
For these reasons, living by a simple rule of thumb is critical for making saving easy. That’s where the 50/30/20 rule for savings comes in. It’s a way to assess the types of expenses you have and calculate how much you should be saving, even in a down economy.
Here’s how it works:
According to the 50/30/20 rule, divide your spending into three categories: needs, wants and savings. Then, here is how you should allocate your take-home pay:
50% to needs
30% to wants
20% to savings
With this rule of thumb, you should have to budget no more than 50% of your take-home earnings to needs such as housing, property taxes, insurance, transportation, utilities, loan payments, healthcare, and even short-term savings for immediate financial needs. Spend no more than 30% of your take-home pay on non-essentials like entertainment, wardrobe updates, travel, eating out, gym memberships, hobbies, and other wants.
What’s left is your 20% to stash away for the future — longer-term goals and financial milestones — and for financial emergencies. This is especially important in an economic downturn or recession, which can create financial uncertainty for almost anyone.
While it may be a little difficult to trim your budget enough to set aside 20% of every paycheck, the actual task of saving can be easy. For example, at Magnolia, you can use payroll deduction to automatically deposit 20% of your net pay into your savings account, where it will grow over time with competitive yields. This makes saving automatic, so you don’t have to think about it or add it to your to-do list. Simply set it and forget it – and then access your savings when you need it. Plus, having your savings in a separate account can help you avoid accidentally spending those funds.
While there are some people who avoid saving because “tomorrow is not guaranteed,” saving is a strategy for living life to its fullest.
Not ready to commit to 20% savings? It’s not always possible but making a commitment to put aside something — anything — on a regular basis can help you prepare for whatever may come, whether financial challenges or opportunities. For help in creating a savings plan that works for you and your budget, give us a call at (800) 997-7919. We can help you identify solutions and strategies for successful saving.