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Strategies to Save

When Is It Okay To Tap My Savings?

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.

Most personal finance advice preaches the gospel of saving, admonishing you to resist the temptations of restaurant meals, shopping sprees and other extravagant expenses. Sock away as much money as you can bear in some sort of savings product, they write. Prepare for the worst!

Let us reassure you that all those nights you suffered from FOMO and dined on leftovers were worth it. We’ve assembled a panel of expert financial planners to weigh in on when and why you should tap your savings, and how to do so intelligently, without derailing your plan for financial security.

You just lost your job

“Short-term, emergency savings are perfect for using when a need arises, but should really only be used in true emergencies such as a job loss,” said Jason Speciner, CFP at Financial Planning Fort Collins based in Fort Collins, Col. And while a week or two of “funemployment” may sound appealing at first, that hoard of pelts you collected in Red Dead Redemption 2 won’t go far with the landlord or your creditors.

Common sense dictates you should cut back whatever expenses you can while you’re in between jobs, but depending on how you lost your job, you may not have to rely completely on your savings to keep you afloat.

Collecting unemployment benefits

If you’ve recently lost your job, you may be eligible to collect unemployment benefits through the joint federal-state unemployment insurance program. The particulars of who can collect unemployment varies from state to state, but in general you must meet the following criteria:

  • You are unemployed through no fault of your own. (The exact definition of which depends on the state, but if you were perhaps fired for showing up to work inebriated, you shouldn’t count on collecting unemployment).
  • You worked a certain amount of time as required by the state to be eligible for unemployment, usually the first four out of the last five calendar quarters prior to the time you file for unemployment. In other words, you will have needed to be working full time for at least a year in most states.

You’ll have to apply for unemployment with your state’s unemployment insurance agency, either in person, over the phone or online. When you do so, make sure you have information such as the dates you worked for the employer, how many hours you worked, and other important details.

Check out this list of links to state unemployment insurance agencies, and also see MagnifyMoney’s detailed guide to filing for unemployment to help ensure you get all of the financial assistance to which you’re entitled.

You just got hit with a huge medical expense

Sometimes an illness or injury can take a greater toll on your financial health than on your body. A recent Kaiser Family Foundation poll found 67% of the country lists unexpected medical bills as their biggest worry when it comes to paying for healthcare, and given the thousands of dollars of debt you can rack up with even a single visit to the hospital, it’s easy to understand why.

“Life happens, and these types of expenses are why financial planners are always adamant about establishing an emergency fund,” said Rick Vazza, CFA at Driven Wealth Management in San Diego, Calif. “Without one, the cost would normally be covered by credit, and if the credit on a large expense can’t be paid off immediately, the interest charges can be significant.”

If your health insurance doesn’t cover enough of the costs to protect you from a bill you can’t afford (or you aren’t fortunate enough to have insurance in the first place), you still have some options before charging that medical bill to a credit card and potentially setting yourself up for years of debt.

How to knock down hospital bills

Getting a hefty bill from the hospital can be enough to send you in a panic, but you should avail yourself of every opportunity to lower the amount you owe before forking over a payment. In general you can:

  • Contact the hospital’s billing department and ask about its bill reduction or forgiveness policies — this will depend on the individual hospital, but depending on your income level and the particulares of your situation, you may qualify for a reduced bill.
  • Offer to pay the hospital in cash (or using a flexible spending account) — sometimes hospitals and other medical facilities will give you a discount if you’re willing to settle the bill right then and there.
  • Charge the bill to a 0% APR credit card — assuming you can qualify for one of these cards, it’s important to remember that the 0% interest only holds for a limited amount of time, so if you’re unable to pay off the money you charge to the card before the time is up, you’ll be stuck making interest payments.

Find out more by consulting our guide on how to get your hospital bill reduced and minimize the drain on your savings.

A major appliance breaks

You don’t want to get in the habit of leaning on your savings to purchase big-ticket items you could do without. But sometimes things fall apart, and if your furnace went on the fritz, you wouldn’t want to wait until your next paycheck to restore heat in your home. You could always charge the repair (or replacement) on a credit card, but make sure you’ll be able to pay off the balance by your next billing cycle if you want to avoid interest payments.

“A good rule of thumb is to dip into the emergency fund whenever the alternative would require carrying a credit card balance to pay for the irregular expense,” said Vazza.

Building a budget for repairs

One way to help soften the blow of dipping into your savings to replace a major appliance is by having a well-planned budget that includes money for such incidentals. Ditch your pen and paper, and try one the many budgeting apps available to help you track your money.

Making a budget means taking a long, hard look at how you spend and save money, which is why it’s often so unpleasant. To begin, you’ll need to determine a few facts such as:

  • How much money you take home every month.
  • How much you spend every month, both on necessities such as rent or mortgage, and luxuries like eating out, entertainment and shopping.
  • How much money you want to save monthly — not only for retirement and long-term financial goals, but also for incidentals such as major appliance repairs.

Learn more about how to use these apps and set up your first budget at MagnifyMoney’s ultimate guide to budgeting.

You need to seize a once-in-a-lifetime opportunity

Dipping into savings to seize an opportunity is more open to interpretation than the other items listed above — is it worth taking money out of your account to invest in your brother-in-law’s dating app idea? But at the end of the day this is your money (and your life), so only you can decide if an opportunity is worth spending the cash.

Consider taking a loan

Depending on the opportunity, you might find a personal loan from a bank can help you cover expenses along with dipping into your savings. Lenders (both traditional banks and online financial institutions) offer plenty of loans to help you out with the associated costs.

Of course, not even the most lenient lenders just hand out sums of money to anyone, and if you find one that does, you should run in the opposite direction — it’s probably a deal too good to be true. Some other things to keep in mind when applying for a loan are:

  • Your credit score, which sums up how big of a risk you are to lenders considering giving you a loan. The higher this score, the more dependable you look to lenders which gives you access to better loan terms such as lower interest payments.
  • The interest rate charged by lenders. This varies depending on the type of loan — personal loans, which usually aren’t backed by any sort of collateral, tend to charge higher interest rates.
  • Is there an origination fee? Some personal loans charge a fee based on a percentage of the total loan amount that must be paid upfront. For example, a $35,000 personal loan with an origination fee of 5% would mean you need to pay a $1,500 origination fee.

Read our guide to find out more about the ins and outs of navigating a personal loan.

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.

James Ellis
James Ellis |

James Ellis is a writer at MagnifyMoney. You can email James 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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