One of the symptoms of having good financial health is determined by the ability to save. The 50/20/30 rule for saving is a guideline that Elizabeth Warren developed. This United States senator, expert in bankruptcy law, determined a way to manage income that guarantees savings. She explains it all in her book “All Your Worth: The Ultimate Lifetime Money Plan”.
The general tendency to calculate the amount we allocate to savings is usually to subtract the income obtained from expenses. And what is left over will be used to save.
The 50/20/30 rule is based on another philosophy when calculating that amount.
How to apply the 50/20/30 rule to save?
To apply this rule, we must have control of the structure of our personal and family expenses and income. The ideal tool for this is to build a budget in a spreadsheet.
In the 50/20/30 rule for saving, we start from monthly income after deducting the tax burden. That is, we start from net income.
We should apply the remaining amount as follows:
- 50% is allocated to cover primary needs.
- 20% goes to savings.
- 30% goes to leisure and whims.
Identify your primary needs
When it comes to analyzing primary needs or basic needs, the 50% percentage may fall short. Therefore, it is necessary to be clear about which items should occupy this section. Among them are those vital for day-to-day life:
- Rent or mortgage payment for the habitual residence
- Electricity, water, gas, community expenses. Although some expenses such as IBI and insurance are not monthly, we must make the monthly proration and take them into account.
- Meal of the month, school expenses, clothing.
- Gasoline or transportation costs.
Expenses for leisure, whims…
Without a doubt, this percentage is the most difficult to adjust. Since 30% is what we will allocate to increasing our quality of life.
Activities such as eating out, joining the gym, going to the movies, taking trips…we will have to plan them and adjust them to the balance of this item.
20% allocated to savings
This point of savings is the most complicated to do. To achieve this, we can use some tricks. For example, using a different account than usual to save that money. Another is to deduct the said amount as soon as we receive the monthly income from the payroll or the income we have. In this way, psychologically we will get the idea of the real amount available that we can count on for the month.
The reality of the 50/20/30 rule to save
This savings rule has a small problem that makes it difficult for most people to put it into practice.
The percentage of 50% is usually insufficient to cover the basic needs of a personal or family economy. Especially in recent times where inflation has caused food and transportation budgets to skyrocket.
In addition to not being very practical for those people whose income does not have a fixed or constant pattern, but rather varies every month.
Other savings formulas
Given this situation, other less orthodox savings formulas are presented but they can help us increase the savings account little by little.
The rounding method has been put into practice in recent years. It consists of rounding up the purchases and payments we make by saving the surplus in another account or wallet. For example, if we are going to buy a loaf of bread that costs 80 cents and we pay with 1 euro, the 20 cents left over will be kept in a different wallet than the one we normally use.
Another way to round is by adjusting it to amounts that are multiples of 5. That is, if we pay something for an amount of 3.18 euros, we calculate the difference up to 5 euros. So the amount allocated to savings in this case would be 1.82 euros.
For payments made by card, it can also be done. There are banking entities that have specific tools to carry out this function. These are virtual piggy banks that allow us to save our savings.
What about you? Have you already thought about what method you will use to increase your savings?
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