Starting your pathway to financial freedom is this simple: Save. But many people ask, “How much should I actually be saving?” Well, the truth is, you should be saving as much as humanly possible. However, extreme saving isn’t always realistic. The 50-30-20 rule gives you some basic guidelines on how you should be saving and spending your money.
50- Living Expenses
50% of your income should be spent on your living expenses. Living expenses include mortgage/rent, car notes, insurances, etc. It is important to remember that this is the MAXIMUM amount that you should be spending on living expenses. Feel free to spend less on your living expenses and save the extra.
30- Money to Blow
This is where you’ll have a little bit of freedom to have fun. You can spend 30% of your income however you want. You can go out and have fun with your friends, take your significant other out on a few nice dates, finally buy that pair of shoes that you’ve been eyeing for months, or whatever else you want. But again, 30% is the MAXIMUM. Feel free to spend less.
This is the most important paragraph of the entire post, so pay careful attention. You should be saving AT LEAST 20% of your income. AT LEAST, meaning YOU CAN and SHOULD save more. Remember, the more you save, the faster you’ll reach the financial freedom that you’re striving for. The most common, yet least effective, way to save your money is to just stash it away in a savings account. However, interest rates are so low on typical savings accounts that you may be actually losing money depending on the current rate of inflation. Historically, the annual rate of inflation is about 3%, this means that the dollar loses 3% of its value each year. If your money in a savings account is growing by less than 1% annually, but the dollar is losing 3% of its value, your money is technically decreasing in value and you are ultimately losing money. Instead of using a savings account, I’d encourage you to invest. Visit my basic investing tips to learn how to begin making your money work for itself today! However, if you are still wanting to save in a savings account, I’d advise you to open an online savings account such as ally.com because they offer the highest interest rates available.