How To Rethink The 50/30/20 Savings Model (And Make It Work For You)
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How To Rethink The 50/30/20 Savings Model (And Make It Work For You)

Pretty much everygeneration before us, has emphasized the importance of saving money. While you can argue that today we live in a credit economy, the old adage of stashing away a little bit of every paycheck remains as true today as ever.

We’re told it’s crucial to save for an emergency fund. Save for school, travel, weddings, retirement. Save enough so you can pay your debt, but afford a lifestyle that doesn’t consist of ramen noodles every night. Still, the question remains: “How much of your paycheck should you actually save?”

There a lot of classic savings and budget models out there you may have already heard of. Maybe you’ve heard it’s good to spend no more than 30 percent of your income on housing costs. Or, maybe you’ve heard how 20 percent of your income is a good savings number to aim for.

Chief among these classic budgeting formulas is the 50/30/20 savings model. In it, half of your income is allocated for your “necessary” expenses. The other half is split 30-20, with 30 percent going to your “wants,” and 20 percent going toward your savings goals.

At face value, it seems like a reasonable model to use for calculating how much of your paycheck you should save. But, it’s by no means a hard and fast rule.

Why? Because aside from taking into consideration your own personal financial history, your savings goals might differ. “It’s hard to put rules and percentages on everything because we are all at different stages in life,” Julia M. Carlson, CEO and wealth advisor, told us via email. Carlson suggests figuring out what stage in life you’re in and what your goals are for retirement, buying a home or saving for travel, for example.

“Decide what the goal is, the time horizon and then use a simple savings calculator to determine how much you need to save a month to reach your goal,” Carlson said.

Millennials today shouldn’t feel constricted to the 50/30/20 budget model, Colin Kennedy, COO of the money app Clarity Money, says. “Millennials lead different lifestyles than the generations before them … Paychecks aren’t always the same month over month.” Chief among the differentiators between this generation and previous ones is the rise of the gig economy and increased work flexibility. As a result, traditional savings models might not apply to a younger workforce, especially one saddled with mounting student loan debt, he explained.

Finally, it’s important to also consider where you live since that could skew your budgeting model. “If you live in LA, NYC, or SF, you could be spending half your income on housing alone,” Amberjae Freeman, impact team co-lead at Swell Investing, says. “Find the base cost to support your hierarchy of needs and work with what’s left. It might be 25 percent or 80 percent—it all depends on the person.”

So, this brings us back to: How much should you save from each paycheck? Here’s a few pointers that can help you determine a formula that works for you.

Take a holistic view of your spending

Before you figure how much you should save from each paycheck, it’s important to scrutinize your current spending habits. Do an audit of your regular subscriptions and decide which ones to cancel. The Clarity Money app, for instance, provides recommendations on credit cards best suited to your current spending habits while also highlighting ways for you to cancel unnecessary subscriptions/services, Kennedy says. The goal is to give a more complete picture of where you’re at financially.

Determine an emergency fund goal based on your job stability

The value of having an emergency fund cannot be overstated. Life loves to throw curveballs, after all! Ellie Thompson, CEO of Money Therapy, suggests aiming for at least $1,000 in an emergency fund, “so when financial hiccups occur you don’t further yourself into debt.” Many financial experts commonly suggest building an emergency savings fund that’s enough to cover three to six months’ of expenses in case you lose your job.

“But there’s a huge difference between three months of expenses and six,” Freeman said. The key is determining the likelihood of you losing your job and how long it would take you to recoup. Freeman advises people ask themselves: Are you are earlier in your career and have more entry-level options if you lost your job? Are you highly specialized and think it would take more time?

Plan how you will tackle your debt

Thompson said she often sees clients make the mistake of developing a savings plan without accounting for how they will eliminate their debt. “The order of operations is creating an emergency fund, getting aggressive about paying down your debt by altering the 50/30/20 rule, then tackling your savings and investments,” she said.

For young adults with “extreme debt,” (that is, more than $50K in debt), Thompson suggests reducing the percentage of your budget for “wants” from 30 to 20 percent. That will allow you to then increase your payments toward debt.

Account for the rate of inflation

Freeman advises accounting for the current rate of inflation of roughly three percent when calculating how much you should save from each paycheck. Even though you might save regularly, goods and services you’ll eventually want to buy with your savings will be three percent more expensive, she explains.

“If your money is in an average savings account earning around one percent in interest, you’re essentially losing money,” Freeman said. Consider, instead, using a high-yield savings account to minimize the difference. “You can find options that return almost two percent which keeps you a little closer to breaking even while you stash your money away,” she says.

Consider investing as another way of saving

“Some people use the terms ‘saving’ and ‘investing’ interchangeably—with good reason,” Freeman says. “The term ‘saving’ sounds like you’re putting your money under a mattress or parking it in a bank vault, but really, putting money in a typical savings account is just one of many saving or investing options.”

While investing in the stock market can be seen as a risky move, the average historical rate of return (seven to ten percent) is much higher than the measly return on most savings accounts (one percent).

Aside from investing or using a savings account, keep in mind your retirement plans or other brokerage accounts, Thompson said. You’re putting money aside to use at a later date, after all.

Finally, automate that shit

“Let the robots do it for you,” Freeman said. “There are so many options for taking out the human elements of instant gratification and temptation. Just get started and set up an automatic deposit so you don’t have to think about it.” Your local bank branch should have an option to regularly transfer funds into a separate account on set dates. Take the time to set up the transfer and then forget about it!

Oh, and if you’re working in an industry where you’re paid in cash, you can still make saving a regular habit. “Play a trick on yourself and save every ten dollar bill you touch,” she said. After all, every little bit counts.

This story was originally published on September 17, 2018. It has been updated (and will continue to be updated) to include new tips, advice, and guidance, to ensure we are always giving you the best, most valuable resources.