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Strategies to Save

Where People Save the Most: Super Saving Metros

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Give credit to the residents of Dubuque, Iowa. They saved their pennies last year, according to a recent study by MagnifyMoney.

Dubuque earned the highest Saving Score in MagnifyMoney’s Super Saving Metros report, which looks at the savings habits of residents living in the biggest metropolitan areas across the United States.

Relying on data from the IRS and U.S. Census Bureau, MagnifyMoney created a Saving Score for nearly 400 U.S. metropolitan areas. This score reveals:

  • Which areas boasted the greatest percentage of adults who earned money from interest-bearing vehicles, such as savings accounts and certificates of deposit (CDs)
  • How much interest on average these residents claimed on their 2017 tax returns
  • What percent of their annual income came from interest

We’ve changed our study a bit this year. Instead of looking at cities with populations larger than 25,000, as we have in the past, this year we are looking at savings within entire metropolitan statistical areas. These areas often include several cities and provide a more accurate look at the savings habits of residents within a larger area.

One of our key findings? As a nation, the U.S. doesn’t have a lot of savers. Nationally, 28.3% of U.S. residents who filed income tax returns in 2017 earned interest income on their savings. This interest income averaged $554, equal to 0.76% of filers’ total income for the year.

Not all metro areas are created equal when it comes to savers, though. In Naples, Fla., for instance, filers reported an average of $3,224 of interest income on their taxes last year. But in Pittsfield, Mass., that average was a far lower $481.

There are also significant differences among metropolitan areas in how many residents earn enough interest from their savings to report to the IRS. Filers who earn more than $10 of interest on savings accounts, CDs, money market accounts, high-yield checking accounts or certain types of taxable bonds have to report their interest income. MagnifyMoney found that in Peoria, Ill., 48% of filers reported interest income on their returns. But in Los Angeles, just 30% did.

Key findings

  • Dubuque pulled down the top savings spot among the 381 U.S. metropolitan areas that MagnifyMoney studied. The city had the highest Saving Score, an impressive 97.8 out of a possible 100.
  • Naples, which came in second with a Saving Score of 97, topped the country with the highest amount of average interest income per return, a strong $3,224. Naples also ranked first in highest percentage of interest income compared to total income. Filers here earned an average of 2.33% of their total annual incomes from interest on their savings.
  • Peoria had the highest percentage of filers who earned at least some interest income. About half of the federal tax returns filed here last year had some amount of interest income.
  • Iowa might have been the thriftiest state in the country in 2017. Dubuque notched the highest Saving Score in this year’s study. But the cities of Cedar Falls and Cedar Rapids also earned high scores. This isn’t a one-time fluke either. MagnifyMoney found a similar trend when looking at the numbers from earlier tax years.

What does the Saving Score measure?

It can be challenging to determine how much the residents of a particular metropolitan area are saving. For our study, we crafted a Metro Saving Score that relies on data from the IRS and U.S. Census Bureau for 381 metropolitan areas across the country.

We looked at three key factors to calculate our score:

  • The percentage of all tax returns that declared interest income
  • The percentage of residents’ total annual income that came from interest earned from savings
  • The average interest income recorded on tax returns in a metropolitan area

50 cities with the top Saving Scores


Dubuque led our list of the metro areas with the biggest savers, earning a healthy Saving Score of 97.8. But what’s so special about Dubuque?

The area isn’t especially rich: The U.S. Census Bureau reported that the median household income stood at $56,154 in 2016 in Dubuque County and $48,021 in the city of Dubuque itself. That’s below the median annual household income of the U.S. as a whole, which was $57,617 in 2016. The Census Bureau also said 16.8% of the city’s residents lived in poverty, while 29.7% of residents have earned a bachelor’s degree or higher.

Regardless of the relatively modest incomes here, 44% of tax filers in the Dubuque metro area claimed interest income on their returns. This interest income averaged $781 per return, which accounted for an average of 1.24% of these residents’ annual income.

So why the high savings rate? Maybe it’s the low unemployment rate. The Bureau of Labor Statistics said the unemployment rate in Dubuque was a low 2.2% as of August 2018. It’s easier to save when you’re employed. Also, it’s not that expensive to live in Dubuque. The Census Bureau said the median costs for owners with a mortgage is $1,102 a month, while the median cost for renters is $728 a month.

Things are a bit different in Naples, where the Census Bureau said the annual median income was $84,830 in 2016. It’s important to note that median income isn’t the same as average income. The median is the dollar amount that half of all residents in an area earn less than each year and half earn more. In Naples, half of all households reported an annual income of less than $84,830, while half reported an annual income higher than that.

What is clear, though, is that the residents of this Florida city have more money to save, which might be why Naples ranked second with a Saving Score of 97. Here, 36% of income tax returns included interest income. The interest income per return in Naples was high, too, leading our survey with a hefty $3,224.

In Fairfield County, Conn., which came in third with a Saving Score of 96.3, 36% of tax returns recorded interest income. The interest claimed here was sizable, too, with an average of $2,434 claimed per return. Again, the residents here have more money to save, with the Census Bureau reporting a median household income of $86,670 in 2016.

Santa Barbara, Calif., and Boston rounded out the top five metro areas on our list. Santa Barbara earned a Saving Score of 95.7, with 36% of tax returns here claiming interest income. This income accounted for 1.18% of annual income earned by residents here. The interest income per return in Santa Barbara was a healthy $1,074.

And in Boston, with its Saving Score of 94.2, 37% of returns claimed interest income, with an average per return of $920.

10 cities with the most savers

Dubuque again represented itself well on our list of metropolitan areas with the most savers. But it didn’t top it. The No. 1 spot went to another Midwestern city, Peoria, where 48% of tax returns listed some form of interest income.

What makes Peoria residents such good savers? It’s hard to say. The income here isn’t sky-high, with the Census Bureau stating that the median household income stood at $46,547 in 2016. At the same time, though, it’s not expensive to live in Peoria, freeing up residents to save. The Census Bureau said it cost $1,200 a month for owners with a mortgage, while the median value of a home was $127,200. Those who rented didn’t pay too much, either, with the Census Bureau reporting a median gross rent of $746 a month.

Then there is Dubuque. Again, the income here wasn’t high, but housing isn’t overly expensive, perhaps making it easier for residents to save. The Census Bureau reported that owners with a mortgage paid a median value of $1,102 a month, while those who rented paid a median of $728 a month. Maybe that’s why Dubuque tied for second with 44% of returns claiming interest income.

Dubuque tied for this spot with Ithaca, N.Y., where the same percentage — 44% — of returns claimed interest income. It’s not easy determining how Ithaca residents were able to save so much. The Census Bureau reported that the median annual household income here was just $30,291 in 2016, while 44.8% of the people lived in poverty. At the same time, the median value of owner-occupied homes stood at a fairly high $219,100. This makes Ithaca’s high savings rate a bit of a mystery.

Appleton, Wis., is easier to explain. This area ranked fourth on our list with 42% of returns claiming interest income in 2017. This isn’t surprising: The Census Bureau said the median household income here was $53,878 in 2016, while the median value of owner-occupied homes was a fairly low $137,800. Perhaps residents spent less on housing costs and were able to save more.

Iowa City, Iowa, finished fifth on our list, tied with Appleton with 42% of returns claiming interest income. That percentage was a popular one, with Rochester, N.Y., and yet another Iowa city — Cedar Falls — tying with Appleton and Iowa City.

10 cities that earned the most interest income

Here is a not-so-shocking fact: People who make more money tend to save more of it. That’s proven by our list of metro areas in which taxpayers claimed the most interest on their returns.

Look at Naples. Those living here earned a lot of interest income in 2017. According to our research, the average return filed here in 2017 listed a whopping $3,224 in interest income. That easily topped our list. The reason is fairly obvious: A lot of wealthy people live here.

The city is a costly one, with the Census Bureau showing that the median home value is $770,000, while it costs owners with a mortgage a median $2,987 a month. With those barriers to entry, it’s not surprising that the median household income was $84,830 in 2016. When you earn more, it’s easier to save more — a lesson made clear in Naples.

Fairfield County was second on this list, with the average tax return listing interest income of $2,434 in 2017. Again, this is another high-income area, with the Census Bureau reporting that the median household income was $86,670 in 2016.

Next on our list is Vero Beach, Fla., where the average interest income reported on tax returns stood at a healthy $1,839. This city is a bit more puzzling: The Census Bureau showed that the median household income was a modest $38,405 in 2016. And it’s not particularly cheap to live here, with the Census Bureau stating the median costs for owners with mortgages as $1,654, while monthly rent stands at a median of $829.

Coming in fourth on our list is another Florida tourist metro, Fort Myers, where the average interest income per return was $1,195. This is an interesting place: In the city of Fort Myers, with a population of almost 80,000, the median household income is $38,971. But if you focus on the smaller area of Fort Myers Beach, where the population is just more than 7,000, the median household income is $59,416.

The New York City metro area claimed the fifth spot on this list, with an average interest income of $1,146 reported per return. With a population of more than 8.6 million, New York City itself sees a wide range of yearly incomes. The median household income is $55,191, but plenty of households saw a far higher income than that. This helps explain the Big Apple’s high spot on this list.

10 cities with the lowest Saving Scores

While there are plenty of metro areas where people are saving, there are others that have earned low Saving Scores from our research. In most of these areas, the median household income is low. In others, unemployment is high.

This isn’t surprising: It’s a challenge to save when you don’t make enough and you’re struggling to find a job.

The first metro area on our list of areas with the lowest Saving Scores — Hinesville, Ga. — earned a Saving Score of just 0.5, with 15% of income tax returns filed in 2017 claiming interest income. The average filer here claimed just $80 worth of interest on their returns.

The median household income stood at $42,949 in 2016, according to the Census Bureau. That is below the median household income for the U.S., which the Census Bureau said was $57,617 in 2016.
El Centro, Calif., ranks high on this list, too, coming in second. Unemployment is a problem here, with the Federal Reserve Bank showing the rate at a high 17.2% in El Centro as of August 2018.

Third on our list was Fayetteville, N.C., earning a Saving Score of 1.8. Only 18% of tax returns here claimed interest income in 2017, with the average return listing just $149 in interest income. The median household income was $43,882 in 2016, while 18.4% of the population lived in poverty. The Census Bureau also reported that 14.2% of the people younger than 65 do not have health insurance, a factor that could account for the low savings rate here.

Pine Bluff, Ark., scored a low 3.0 Saving Score with 19% of income tax returns claiming interest income. Pine Bluff’s population is declining, falling to 42,984 in 2017, a drop from 49,083 in 2010 — a dip of 12.4%. At the same time, the median household income was just $30,942 in 2016, while 32.5% of residents lived in poverty.

Rounding out the bottom five of savers was the metropolitan area of Florence, S.C., with a Savings Score of 3.7. Just 17% of returns here claimed interest income in 2017. The median household income here was not terrible, but at $44,989 is still below the median for the U.S.

How to save more money

Need to increase your savings rate? There’s no secret formula. Start with crafting a household budget. List the income that comes into your household each month and the money you spend during the same time. Include both fixed expenses such as your monthly rent, mortgage payment, auto payment or student loan payments while estimating those that vary each month, such as your utility bills, transportation costs and grocery bills. Make sure to also budget for discretionary expenses such as eating out and entertainment.

This budget will tell you how much you should have at the end of the month for savings. If you don’t have much, or if you are spending more than you are earning, you’ll need to cut back on whatever expenses you can. This might require slashing your spending at the supermarket or cutting back on restaurant meals.

Be sure to start an emergency fund, too. You use the dollars in this fund to pay for any unexpected expenses that pop up, such as a busted water heater or blown transmission on your car. If you have this fund built up, you won’t have to resort to paying for these emergencies with a credit card, something that will build up your debt and make it even more difficult to save.

It’s important to note, too, that it might be a bit easier now to earn interest on your savings. That’s because as the Federal Reserve raises its benchmark interest rate, banks and credit unions are starting to do the same, boosting the interest rates attached to their savings accounts and CDs. These rates might still be small, but they are set to improve, so now is a great time to begin saving those dollars.

Methodology

To rank cities, MagnifyMoney created a Saving Score on a scale of 0 to 100 that included three equally weighted components:

  1. How broadly individuals in the metro saved (measured by the percentage of all tax returns that declared interest income, ranked by percentile).
  2. The metro’s dedication to saving regardless of their income (measured by the percentage of total income that came from interest, ranked by percentile).
  3. The absolute magnitude of savings in the metro (measured by the average interest income per tax return, ranked by percentile).

MagnifyMoney measured these factors using anonymized data from tax returns filed with the IRS from Jan. 1 to Dec. 31, 2017.

To be counted as a saving household, the taxpayer must declare interest income using Form 1099 on their 2016 tax returns. Filers who earned over $10 in interest on savings and investments, including a high-yield checking or savings account, a CD, a money market account or certain types of taxable bonds, should have received a copy of 1099-INT, which reflects interest income reported by financial institutions to the IRS.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Dan Rafter
Dan Rafter |

Dan Rafter is a writer at MagnifyMoney. You can email Dan here

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Strategies to Save

How to Save Money Using the 20% Savings Rule

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

You can find a lot of conflicting financial advice out there, but one recommendation that is rarely disputed is that you need to save money for the future. A strong savings game – including a savings account, an emergency fund and a retirement account – is a basic requirement for good personal financial health.

Understanding that you should build your savings is step one. Step two is knowing how much to save. That’s where the 20% savings rule comes in. This rule is part of the 50/30/20 budgeting method, popularized in a 2006 book by U.S. Senator Elizabeth Warren and her daughter Amelia Warren Tyagi, titled “All Your Worth: The Ultimate Lifetime Money Plan”.

Read on to learn more about the 20% savings rule and how it can help you save more.

What is the 20% savings rule?

The 50/30/20 budget recommends you divide your after-tax income in three broad categories:

  • 20% for savings: This includes savings for both near-term goals and your long-term financial security. Money in this category should be saved in an emergency fund, a high-yield savings account, and retirement accounts.
  • 30% for wants: Spending for things that are nice to have, but not strictly necessary. Money in this category is for entertainment, dining out, vacations, or a gym membership.
  • 50% for needs: Money in this category is for required monthly expenses like rent or mortgage payments, utilities, insurance, groceries and transportation.

Stephen Caplan, a financial advisor with Neponset Valley Financial Partners, a wealth management firm in the Boston area, said the 20% savings rule makes a lot of sense, especially for young people, because it helps safeguard against lifestyle inflation.

“The beauty of maintaining a 20% savings rate is that as you progress in your career and increase your earnings, you are able to live a nicer lifestyle and direct more money toward your future financial goals,” Caplan said. “If you focus on saving a specific dollar amount, rather than a percentage of your income, it’s easy to frivolously spend additional income.”

How to maximize the 20% savings rule

What makes the 20% savings rule work? It’s simple, flexible, and it can help you save more in the long run. Here’s how to make it work for you.

Set a budget

While other budgeting methods rely on detailed categories and strict dollar amounts, the 20% savings rule lets you allocate a percentage of your income to a variety of savings methods and accounts. This can be especially helpful if your income fluctuates from month to month. In months when you earn more, you can save more. If you earn less, you save less.

Start by calculating your after-tax income. This is the amount you have available to spend each month after taxes have been withheld from your paycheck or set aside for quarterly estimated payments if you are self-employed. If your employer withholds retirement contributions or insurance premiums, add them back in to reach your after-tax income. Now, multiply that number by 20%. Ideally, that’s how much you’ll put aside to savings each month.

Establish an emergency fund

Having an emergency fund is an essential component of long-term financial success as it prevents life’s curveballs, such as job loss, medical bills or unexpected home repairs, from sending you into debt.

Most financial experts recommend building an emergency fund equal to three-to-six months of expenses. If you don’t have this much saved yet, allocate a chunk of your 20% savings to establishing an emergency fund.

Focus on fixed costs

If you have trouble allocating 20% of your income to savings, Caplan recommends taking a hard look at the needs category before cutting wants.

“Too many people focus on trying to cut back the 30% discretionary spending category and ignore the big purchases in the 50% category,” Caplan said. “These expenses are usually fixed costs, such as mortgage, rent, and car payments, so getting them right from the start can have a significant impact on your financial well-being.”

Maybe you are spending more than you can afford on housing. It’s not simple to find a new apartment or sell a home, but over the long term paying less in rent or downsizing your mortgage could yield major savings. That new SUV may have felt great during the test drive, however it may be possible to reduce your monthly car payments by finding a more modest sedan. Again, downsizing could help rightsize your budget.

Get out of debt

Another unique aspect of the 50/30/20 rule is how it treats debt payments. Mortgage payments and minimum payments towards other debts, such as student loans and credit cards, are categorized as needs. After all, you need to pay at least this much every month to keep your home, avoid defaulting and preserve your credit score.

However, any additional payments made to reduce the principal balance of your debts are considered savings because once you’re out of debt, you can redirect those payments to savings.

If you have non-mortgage debt, after establishing an emergency fund, allocate a portion of your 20% savings to getting out of debt. The sooner you pay it off, the more you’ll have for long-term saving and investing.

Save for retirement

If you have access to a retirement plan through work and your employer offers matching contributions, you can boost your retirement savings without allocating more than 20% of your income to savings.

Contribute at least up to the percentage your employer matches. When your employer matches your contribution, it’s free money for you.

Create an automated savings plan

Too often, people make the mistake of saving only what is left over after covering their needs and wants. You can avoid this by automating your savings. Most banks will allow you to set up an automatic draft from your checking account into savings, or your employer may be able to have a portion of your paycheck direct deposited into savings.

When you automate your savings, you’ll save time, make it easier to commit to paying yourself first and reduce the temptation to spend what you should be saving.

Is 20% the right amount for you?

The 20% savings rule is simple and flexible, but it’s not for everyone. If you’re living paycheck-to-paycheck, just covering the necessities or facing other financial difficulties such as job loss or debt, you might need to work on increasing your income before you prioritize saving.

Caplan also noted the 50/30/20 rule might be a challenge for people residing in cities with high cost of living like San Francisco, New York, Los Angeles, and even Boston. “You’ll earn more in these cities,” Caplan said, “but housing costs a disproportionate amount of your income. This makes it challenging to keep your fixed costs under 50% of your income.”

If allocating 20% of your income to savings just isn’t feasible, start with a lesser amount, such as 15% or even 5%. The most important thing is to start saving. Eventually, as your circumstances change and you pay off debt, you can get closer to the 20% rule of thumb.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Janet Berry-Johnson
Janet Berry-Johnson |

Janet Berry-Johnson is a writer at MagnifyMoney. You can email Janet here

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Strategies to Save

Understanding the 50/30/20 Rule to Help You Save More

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Budgeting is tough. Not having enough money to cover your monthly expenses can leave you scrambling to dip into your emergency fund or relying on a credit card.

If you are looking for another way to manage your finances, you could consider percentage-based budgeting, which relies on a percentage of your income to determine your spending limitations. In a month where you earn more, you’ll have more to spend across your categories.

One approach is the 50/30/20 rule. This budgeting method was popularized in “All Your Worth: The Ultimate Lifetime Money Plan,” the 2006 book by U.S. Sen. (and current presidential candidate) Elizabeth Warren and her daughter Amelia Warren Tyagi.

Read on to learn more about the 50/30/20 rule, how to use it and why it might be the key to helping you save more.

What is the 50/30/20 rule?

The 50/30/20 rule states that you should budget your income in three categories: needs, wants and savings. It starts with your after-tax income. This is the amount you have available to spend each month after taxes have been withheld by your employer or set aside for quarterly estimated payments if you are self-employed.

If you receive a paycheck and your employer withholds retirement contributions or insurance premiums, add them back in to get to your after-tax income. Once you’ve determined your monthly income, you’ll budget it as follows:

  • Budget 50% toward your needs: These are required monthly expenses, such as your rent or mortgage payment, utilities, insurance, groceries and transportation.
  • Budget 30% toward your wants: This is the fun stuff, such as dining out, entertainment and the barre class you take on Saturday mornings.
  • Budget 20% toward your savings: This is for your financial security and long-term goals, such as creating an emergency fund or saving for retirement. This also includes vacations or home improvements.

Todd Murphy, a financial advisor with Prime Financial Services in Wilton, Conn., recommended direct depositing your paychecks into multiple bank accounts: 50% to checking for needs, 30% to a different account for wants and the remaining 20% to retirement and savings accounts.

“The most successful clients have separate banks for these accounts to limit the tendency to talk themselves into making ‘exceptions’ on their spending,” Murphy said.

An important note: If you’re working to pay off non-mortgage debts, such as student loans and credit card payments, you might wonder where those fit. Payments towards these debts fall into two categories:

  • The minimum payments required by your student loan or credit card company are needs. You need to pay at least this much every month to avoid default and harm to your credit score.
  • Any additional payments made to pay off the balance faster and get out of debt are savings. Why? Because once you’re out of debt, you can redirect those payments to saving and investing.

How to use the 50/30/20 rule

To show you how the 50/30/20 rule works in the real world, let’s consider a hypothetical example. Miguel’s take-home pay from his full-time job after taxes is $3,900 a month, and his employer withholds $200 a month for health insurance. Here is how Miguel might budget using the 50/30/20 rule.

Step 1: Calculate after-tax income

Since Miguel’s employer withholds $200 a month for health insurance, Miguel adds that amount back to his take-home pay to determine his income of $4,100.

Step 2: Cap needs at 50%

Now that Miguel knows his monthly after-tax income, he needs to think about his needs — what he spends each month on housing, utilities, insurance, groceries and the car that gets him to and from work.

According to the 50/30/20 rule, these costs should take up no more than 50% of his $4,100 income, or $2,050.

Miguel’s costs in this category are as follows:

Step 3: Limit wants to 30%

According to the 50/30/20 rule, Miguel has $1,230 to put toward his wants. That number may seem like a lot to some people, but limiting wants to 30% of income can be difficult.

Miguel has a Netflix subscription, stops for coffee every morning and likes to meet up with friends once a week for drinks. He also likes to take his girlfriend out to nice dinners a couple of times a week and tinker on his vintage motorcycle. Spending on all of those interests adds up.

Step 4: Restrict savings to 20%

The rest of your income should be set aside for emergency savings, putting money toward retirement, saving for future goals and getting out of debt.

According to the 50/30/20 rule, Miguel has $820 for the saving category. Let’s assume that Miguel already has an emergency fund, so he wants to prioritize retirement, paying off debt and saving for an engagement ring. His spending in this category might look like this:

How the 50/30/20 rule can save you more

The great thing about the 50/30/20 rule is it gives you a guideline for living within your means so you can save more.

Make adjustments

The 50/30/20 rule could open your eyes to changes you need to make. For example, if you run the numbers and realize housing takes up nearly 50% of your income, leaving little room for other necessities, you might decide to relocate to a less expensive neighborhood. Or you could look for other ways to reduce spending in the needs categories by shopping for new insurance or clipping coupons when you go grocery shopping.

Reduce your wants

If you’re overspending in the wants category, you may need to change up your daily habits: make coffee at home instead of buying it, cook at home more often or reconsider expensive hobbies. Small changes can add up to big savings over time.

Get a retirement bonus

If you have access to an employer-sponsored retirement plan, you may be able to get a boost to your savings without touching the other categories.

“Contribute up to the percentage your employer matches into your 401(k) or 403(b),” Murphy said. You’ll receive an automatic bonus when your employer matches your contribution.

Put more money into savings

Savings is an essential part of any budget because, without it, unforeseen expenses can leave you struggling to pay necessary costs of living or get you into debt. If you run the numbers and realize you’re not saving enough, look for ways to trim expenses in the needs and wants categories.

Pay off debt faster

Knowing you have 20% of your income to dedicate toward savings and paying off debt can motivate you to pay more than the monthly minimum and make a bigger dent in your balance.

After setting up your emergency fund, prioritize paying off debts. The sooner you pay off any credit cards, student loans and car loans, the more you’ll have to invest and save for retirement.

Is the 50/30/20 rule right for you?

As long as you have income left over after covering your needs, the 50/30/20 rule can work for you. However, if you run the numbers and realize a 50/30/20 split just isn’t feasible right now, don’t give up. Maybe your categories look more like 60/30/10 right now. That’s OK. Start where you are and look for changes you can make to reduce your cost of living, change your spending habits and get closer to a balanced budget.

Bottom line

The 50/30/20 rule is far from the only way to budget, but it’s a simple formula that allows you to meet your wants and needs and save money without strict dollar amounts and inflexible budget categories.

Murphy acknowledged this method might not work if you are experiencing financial difficulties, such as being laid off from your job. In that case, you may need to work on increasing your monthly income to cover your needs before allocating money to wants.

“Greater savings allows for more flexibility,” Murphy said. “If you live on less than half of your income, you are likely to never have a personal recession, regardless of the economy.”

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Janet Berry-Johnson
Janet Berry-Johnson |

Janet Berry-Johnson is a writer at MagnifyMoney. You can email Janet here

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