Some people are better at saving money than others. Those who are good savers generally know how to live within their means, and they tend to keep their living expenses low compared to their earnings. Those who aren't natural savers, by contrast, tend to fall into the trap of spending most, if not all, of their income on their basic needs. And then there are those who truly go overboard, spending more money than they bring home and racking up debt in the process.
No matter your age, it's important to start saving money for things like retirement, emergencies, and major life goals such as buying a home. Creating a budget can help you manage and keep track of your living expenses so there's money left over to help you meet your savings targets.
Taxes
The first rule of establishing a budget is figuring out your take-home pay. Remember, your salary is notthe amount you take home. If your job pays you $60,000 a year and you're in the 25% tax bracket, then you'll pay about $10,800 in taxes on that income, leaving you with $49,200. That's about $4,100 a month that you can put toward living expenses and savings. (Note that your tax bracket, also known as your marginal tax rate, is not the rate you pay on all your income. Your effective tax rate is generally much lower. See this article for more details.)
Housing
Housing is generally the average person's greatest monthly expense. It's best to keep your housing costs as low as possible, but under no circ*mstances should you allow more than 30% of your take-home pay to go toward housing. If you're a homeowner, that 30% includes not only your mortgage payment, but also your monthly property tax and homeowners' insurance payments as well.
The 50/20/30 rule
When creating a budget, you can list each and every monthly expense you incur as its own line item, or you can combine some of your expenses and follow what's known as the 50/20/30 rule. The benefit of the 50/20/30 rule is that it groups certain expenses together to make your budget easier to track. The 50/20/30 rule splits your living expenses into three main categories:
- Fixed costs that stay the same month after month, such as your rent or mortgage, car payment, and cable bill. Fixed costs should take up 50% of your income.
- Variable costs that can change from month to month, such as entertainment, groceries, and clothing. Variable costs should take up 30% of your income.
- Savings, which should take up 20% of your income
The 50/20/30 rule allows you to retain some flexibility in your budget while saving a nice percentage of your income. While you can always adjust these percentages to accommodate your circ*mstances, limiting your fixed costs to 50% of your income should leave you with enough money left over to save and cover your variable expenses. Along these lines, allocating 30% of your income to variable costs means you'll have a decent amount of wiggle room within that category alone.
Identifying essential costs
A big part of saving money is learning to distinguish between essential and non-essential living expenses. Essential living expenses are non-negotiable; you simply can't function without them. Examples include housing costs, auto insurance, and food. Non-essential living expenses include restaurant meals and fancy electronics, which may be nice to have but aren't necessary. Limiting your non-essential living expenses can help free up more of your income for more important things, like savings.
Growing your savings
Once you distinguish between your essential costs and those that are "wants" more than "needs," you can work on making changes that allow you to build your savings. While the majority of your income will probably go toward your living expenses, make sure your budget leaves you enough room to save money as well. Your first savings goal should be to put together an emergency fund with enough money to cover three to six months' worth of expenses. From there, you should work on saving for retirement. Many financial experts recommend saving at least 10% of your income for retirement, and the sooner you begin, the more time you'll have for that money to grow. You may start off by saving a small sum each month and increasing that amount gradually, but the key is to make saving a priority regardless of how much money you earn.
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FAQs
We recommend the 50/30/20 system, which splits your income across three major categories: 50% goes to necessities, 30% to wants and 20% to savings and debt repayment.
What is the ratio of income to living expenses? ›
50% of your net income should go towards living expenses and essentials (Needs), 20% of your net income should go towards debt reduction and savings (Debt Reduction and Savings), and 30% of your net income should go towards discretionary spending (Wants).
What percent of your income do experts say you should save? ›
At least 20% of your income should go towards savings. Meanwhile, another 50% (maximum) should go toward necessities, while 30% goes toward discretionary items. This is called the 50/30/20 rule of thumb, and it provides a quick and easy way for you to budget your money.
What percentage of income should go to fixed expenses? ›
Fixed expenses 50%
These unchanging costs should stay within 50% of your monthly income. Choose housing, transportation, and monthly subscriptions you can afford to sustain without draining your wallet.
What is the 70% income rule? ›
Living expenses should consume 70% of after-tax income, covering necessities and discretionary spending. Savings and debt repayment are prioritized at 20%, focusing on high-interest debts and building emergency funds.
What is the 50 30 20 rule of money? ›
Key Points. The 50-30-20 rule is a simple guideline (not a hard-and-fast rule) for building a budget. The plan allocates 50% of your income to necessities, 30% toward entertainment and “fun,” and 20% toward savings and debt reduction.
What is the best income to expense ratio? ›
Your ideal income versus expenses ratio
- Keep your housing costs to less than a third of your take home pay.
- Always try to save at least 10% of your income.
- Keep your discretionary spending around 10%.
- Try to keep your bills to 33% of your income.
- SARAH'S TAKEAWAY:
But it is possible to live well even on a small amount of money. Surviving on $1,000 a month requires careful budgeting, prioritizing essential expenses, and finding ways to save money. Cutting down on housing costs by sharing living spaces or finding affordable options is crucial.
What state has the best income to cost of living? ›
Utah came out on top as the most affordable state, thanks to manageable health care costs. On the other hand, the high homeownership costs landed New York as the least affordable state. We analyzed median incomes and five basic expenses: homeownership costs, groceries, health care, income tax and gasoline.
How much money do you need to retire with $100,000 a year income? ›
More? Financial planners often recommend replacing about 80% of your pre-retirement income to sustain the same lifestyle after you retire. This means that if you earn $100,000 per year, you'd aim for at least $80,000 of income (in today's dollars) in retirement.
According to the $1,000 per month rule, retirees can receive $1,000 per month if they withdraw 5% annually for every $240,000 they have set aside. For example, if you aim to take out $2,000 per month, you'll need to set aside $480,000. For $3,000 per month, you would need to save $720,000, and so on.
Do 90% of millionaires make over 100k a year? ›
Ninety-three percent of millionaires said they got their wealth because they worked hard, not because they had big salaries. Only 31% averaged $100,000 a year over the course of their career, and one-third never made six figures in any single working year of their career.
What is the 80 20 rule for expenses? ›
YOUR BUDGET
The 80/20 budget is a simpler version of it. Using the 80/20 budgeting method, 80% of your income goes toward monthly expenses and spending, while the other 20% goes toward savings and investments.
What is the 70 20 10 budget rule? ›
By allocating 70% for what you need, 20% for what you want (either immediate luxuries or future savings goals), and 10% for your goals (like paying off debts and saving or investing in your future), you can work towards a greater sense of financial wellbeing.
What is the 60 20 20 rule? ›
Put 60% of your income towards your needs (including debts), 20% towards your wants, and 20% towards your savings.
What is the 50 30 20 rule for 401k? ›
The rule suggests you direct 50% of your after-tax income toward needs, 30% toward wants, and 20% toward savings and debt.
What is the 28 36 rule? ›
According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance. Private mortgage insurance.
Can you live off $1000 a month after bills? ›
Getting by on $1,000 a month may not be easy, especially when inflation seems to make everything more expensive. But it is possible to live well even on a small amount of money. Surviving on $1,000 a month requires careful budgeting, prioritizing essential expenses, and finding ways to save money.
Is the 50/30/20 rule realistic? ›
The 50/30/20 rule can be a good budgeting method for some, but it may not work for your unique monthly expenses. Depending on your income and where you live, earmarking 50% of your income for your needs may not be enough.
