How to calculate what you should save based on your income with this simple percentage rule. Estimating a typical percentage that can vary as our income grows or decreases can be useful.
Personal finances can be as complex as you want, but there are also little rules that help us get an idea of how our accounts are, and if there is something wrong between the legs of income, expenses and savings.
The well-known rule of 50/30/20 – one of the most popular – recommends that we must save 20% of the net income we have. But it is not always that simple, of course. There are times when our economy is not so buoyant and fixed expenses can eat into this idea of savings . But when we have a more or less controlled situation, it is convenient to stop and look at how much we are spending each month.
The 50/30/20 rule to save
Under the popular 50/30/20 rule, 50% of a budget should be set aside for essentials like rent, mortgage or food, 30% for other expenses, and at least 20% for savings.
We agree with the recommendation to save 20% of monthly income. But it is not always so easy to suggest the right percentage based on income.
If, for example, we have a high income, it would be convenient for us to keep expenses low and save a much higher percentage of them.
On the other hand, if saving 20% of income becomes very complicated, or even impossible at this time, keep in mind that it is better to save something than nothing.
Taking this to a practical case, from an income of 1,000 euros per month we would extract directly to save 200 euros. Of about 2,000 euros, 400; or 600 in the event that we enter 3,000.
Senator Elizabeth Warren popularized the so-called “50/20/30 budget rule” (sometimes referred to as “50-30-20”) in her book All Your Worth: The Ultimate Lifetime Money Plan.
According to his initial idea, the objective of saving this 20% is to first have an emergency fund , and then continue saving to achieve goals (change of car, mobile) and cover unforeseen events.
The importance of an emergency fund
Experts usually recommend having enough money saved in the emergency fund to cover three to six months of living expenses. For example, if we are left without work, and this fund goes ahead of, for example, another type of savings destined to buy a car or make a reform.
If emergency funds are ever used, the first allocation of additional income must be to replenish this amount.