Does the 20% Savings Rule Actually Work?

When it comes to saving money, experts often suggest saving at least 20% of your income. While this may be a good financial rule of thumb, it doesn’t work for everyone.

To figure out whether the 20% savings rule is the best option for you, it’s first important to understand more about this method of saving money. From there, you can decide whether it’s right for you. To learn more, read on.

A Quick Review of the 50/20/30 Rule 

The 50/20/30 rule is a minimalist-style budgeting tool that refers to how much of your take-home pay you should save and how much you need to allocate for expenses and other goals.

The rule simply states that 50% of your income should be devoted to essential expenses like housing, food, and utilities. Another 30% should go toward discretionary spending on the fun stuff. This leaves 20% for your savings, which can be earmarked into a savings account,  an emergency fund, and a retirement account.

Is 20% Always the Right Amount to Save?

I know what you may be thinking. While it sounds pretty simple, saving 20% of your income can be unreasonable it you’re just starting out or trying to make ends meet.

For this reason, 20% isn’t always the magic number. If saving this amount is out of your reach, then start with a lesser amount. The most important thing is that you start somewhere and save a set amount of money that works for you.

I can remember how awful I felt when I was laid off from my job during the Great Recession and was forced to stop contributing to my retirement accounts. At the time, I had no other choice. I could either continue to invest for my future or I use that money to buy groceries. Fortunately, I knew that this time in my life would pass, and that I would be able to get a handle on my finances and start saving again. I was right. As time went by, I was able to increase my savings rate until it exceeded my original savings goals.

With this in mind, remember that the 20% savings rule is really just a rule of thumb.

Does the 20% Savings Rule Work?

Yes, the 20% rule works – at least for the most part. If it didn’t work, financial experts would not continue to praise its simplicity. So, if possible for you, it’s a good idea to start saving 20% of your income today.

The bottom line: if you can consistently devote 20% of your income to savings over the long-term (think: decades), you’ll have a better shot of retiring comfortably.

But, just because the 20% rule works, keep in mind what was discussed above: it may not work for you. If your financial situation is less than stellar due to debt or other unfortunate circumstances, you may need to find an alternate route to a healthy financial future. If you think you need another savings method, take a look at the helpful tips below:

  • Create a budget. To start saving whatever you can, it’s a smart idea to first figure out how much money is coming in and going out each month. To do this effectively, we suggest tracking your expenses and creating a budget. This way you can identify areas where you can trim the financial fat, freeing up funds to save. For instance, if you track your expenses and realize you’ve been spending an average of $400 in restaurants for the past three months, you’ve just identified something you can significantly cut back on. Not only is cooking at home good for your waistline, but it’s good for your bottom line. And that’s a win-win.
  • Automate your savings. Life can easily get in the way when it comes to saving money. Too often than not, the end of the month rolls around and you realize you didn’t set anything aside for savings. To help get around this, try making saving money automatic. In fact, Chime makes it simple with its Automatic Savings feature. Here’s how it works: each time you use your Chime debit card, your transaction is rounded up to the nearest dollar and the round up amount is deposited into your Chime Savings account. Plus, you can set up your account to automatically transfer 10% of each paycheck into your savings account. This makes saving money a no brainer!

Start Saving Money Now

There you have it: an explanation of the 20% savings rule, why it’s so popular, and what you can do if you need other savings options. Remember, there is more than one route to a healthy financial future. Are you ready to start saving more money today?

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