Let’s face it. We live in far from certain times when it comes to our financial future. And while we all have our own particular savings goals in mind, there’s one underlying consensus we can all agree upon: building financial security shouldn’t be wishful thinking. It should be a necessity.
But while we all have different financial goals, we all have a different standard of living as well. And sometimes? That standard of living can actually get in the way of our long term goals if we’re not careful.
Luckily, there’s a certain standard we can apply to our savings which can help us optimize our current budget to meet both short term and long term goals. It’s called the 50/30/20 rule; and if you haven’t learned it yet, it can mean the difference between security and worry.
What Is The 50/30/20 Rule?
At its simplest, the 50/30/20 rule means
- No more than 50 percent of your monthly income should be allocated towards absolute necessities: bills, car payments, mortgage or rent and groceries being the most immediate.
- 30 percent of your monthly income can be allocated to discretionary items: vacations, new household purchases, charitable donations and simple pocket money all fall under the umbrella of discretionary spending.
- 20 percent of your monthly income should be strictly allocated to your savings, be it through an employer sponsored 401(k), a bank savings account or mutual funds and stocks.
Sounds simple, right? Not always.
How Can I Organize My Budget Around The 50/30/20 Rule?
It’s important to remember that while the 50/30/20 rule is an ideal standard, circumstances vary wildly for each of us. Some of you may be fortunate enough to be high income earners who can afford to put away substantially more than 20 percent each month for savings, while some might find saving more than 5 percent a month to be practically impossible.
But there’s one thing people don’t always tell you about the 50/30/20 rule: what happens when there’s an emergency? What happens when our absolute necessities increase, threatening both our savings and our peace of mind?
There’s some room for flexibility in the 50/30/20 rule. If you’re not able to save 20 percent each month, start with the bare minimum of what you can afford. If you find that there’s a huge discrepancy in your monthly discretionary spending, consider allocating more towards savings. And above all, keep an emergency fund available—even if it’s just two percent of your monthly income. Hopefully, you’ll never have to use it but (as the old maxim goes) it’s better to be safe than sorry.
What If I Need Further Advice About Saving For The Future?
Also keep in mind that the 50/30/20 rule is just the start when it comes to planning for financial security in the future. And if you’re on active military duty, you’re already sacrificing enough. Maximizing your benefits shouldn’t be a further task.
That’s why we’re here to help you. We’re the Armed Forces Benefits Network and we’ve been providing active and retired military members, federal employees and their families make the most out of their future today. Find out more at Armed Forces Benefits Network.