I have a question for you. How much money do you save? 3%, 5%, 10%, 20% of your income? Or more?
When someone asks how much money they should save each month, I ask them back: "What are your savings goals?"
That's a serious question. Your ideal savings rate depends on your specific and long-term reasons for saving.
I'm sure you've heard the saying that the only things in life that are certain are death and taxes. Yet, we have other constants that require attention in our lives. Unless you're "off-grid" and on a pirated internet connection, you will have power bills, water bills, internet bills to pay. Life has a way of costing us a lot of money to "just" live. It can be easy to forget your expenses when you're working every day and getting pay checks regularly deposited into your bank account.
Something changes mentally when we hit retirement, doesn't it? Suddenly, you are more mindful of the money flowing in and out of your retirement account. Living on a fixed income means if you'll need "extra" in a few months, you'll need to live on less now to achieve that, or you'll need to tap into your precious savings and reserves.
The 50-30-20 rule is one method of budgeting that can help you keep your spending in alignment with your savings goals. Budgets should be about more than just paying your bills on time—the right budget can help you determine how much you should be spending, and on what. The 50- 30- 20 rule can serve as a great tool to help you diversify your financial profile, reach dynamic savings goals, and foster overall financial health.
50% for the essentials.
These are non-negotiable costs. This would be your power bill, water bill, mortgage, insurance, and other recurring costs.
Housing - like a mortgage or rent should not be over 30% of your total income. This housing part is your mortgage payment, your property tax, and insurance as well. I would also suggest including your essential bills that may vary. Power is likely not a fixed expense as some months you may use more or less. The key here is to determine what is essential versus optional.
If you are under 50%, congratulations! This will free up some extra to enjoy and to add to your savings. The lower this percentage is, the more flexibility you will enjoy in your budget. You can help extrapolate how much retirement income you will need by knowing your estimated expenses for retirement planning. Whether your projected fixed expenses are over or under 50% of your projected income is a good measuring stick for your financial health.
30% for Variable Expenses
This section is for more variable expenses. I include groceries here. Why? Because what you decide to eat will likely not be the bare minimums. You will eat nicer meals one week and less fancy ones the next. So while eating is essential to survive, this section would also include those times you decide to eat out vs cooking at home.
I also include replacing clothes here as well, for example. These are expenses that do not recur as frequently and how large the budget is can be quite flexible.
Entertainment spending falls into this category as well, going to see the latest Spider Man movie is not essential, even if it is highly enjoyable!
The "fun" spending falls into this section. We've relegated a large portion of our annual income to cover the "musts" of life, and now we have room for the "wants" in life as well. This is where you will need to prioritise and decide which expenditures are "worth it", and which are not.
20% for Saving and Investing.
The last 20% should be tucked away for the future. This will be how you build those precious reserves you may need to tap into during retirement when you're on a fixed income. Furthermore, if your retirement budget allows you to save more, you can invest it to generate even more income next year. This compounding will allow you to have more wiggle room in your overall budget and save more as well.
Figuring out your finances is confusing and it’s often hard to know where to start. That’s one reason the 50-30-20 rule of thumb works so well: It’s an easy way to get a handle on something that can otherwise be intimidating.
Even if it is hard to take it any further by tracking how well you stick to these targets, it’s still a good way to take your financial pulse. If you do not save or invest now, when you retire, the only one to be blamed is you and your spouse. Ok, so maybe the dog too.
Till next time, get that money off its lazy ass and put it to work! Your retirement will thank you for it!