Ideally what portion of one's income should be dedicated for savings? When it comes to saving, something is better than nothing, and more is better than less. That's not much help—but this simple guideline might be:
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50% of your after-tax income goes to needs
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20% goes to savings and debt repayment
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30% is for wants
This streamlined budget guide, or Balanced Money Formula, comes from the book All Your Worth: The Ultimate Lifetime Money Plan, by Elizabeth Warren and Amelia Warren Tyagi. Yes, that Elizabeth Warren, the U.S. Senator from Massachusetts who was the driving force behind establishing the Consumer Financial Protection Bureau, Washington, D.C. Warren and Tyagi categorize the terms this way:
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Needs are those expenses you must pay: housing, food, utilities, transportation costs, insurance.
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Wants are flexible expenses: cable television, restaurant meals, concert tickets, crafts and hobbies, clothing beyond the basics.
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Savings accounts for money left after you take care of wants and needs. It includes what you set aside for the future as well as any debt payments outside of a mortgage or car.
This is a good starting point, although in practice it's a better plan to pay yourself first. Automate your savings by setting up direct deposit of your paycheck and then have money automatically transferred from checking to savings. To set up direct deposit, talk to the staff in your company's Human Resources department. To set up automatic transfers, contact your credit union’s customer service.
The authors say when your money is in balance, you always have enough to pay your bills, have some fun, and save for your goals. And once your money is in balance, you can stop worrying about it. Managing your money becomes automatic.
If you're starting from zero, be realistic and don't expect to hit 20% savings with your next payday. But make progress toward that goal and be consistent. You are striving for a money plan that is sustainable. Organize your savings around short-term, medium-term, and long-term goals. In the near future, for example, you might want to plan a family vacation. Within the next few years, you might want to build an emergency fund equal to three to eight months' living expenses. A long-term goal would be to create a solid retirement fund. If your company offers a 401(k) plan, max out your contributions, or at least meet the company match. Because you make this contribution before taxes are deducted, you won't be giving up so much of your take-home pay. Warren and other retirement advisers recommend putting 10% of take-home pay—half of the 20% savings slice—toward your retirement.
Once you decide how much to save, look for opportunities to find more money for your goals—put the money you get from a raise or a bonus, a tax refund, or profits from a garage sale into your savings. Knowing you have these funds safely stored away and growing in your credit union should bring you peace of mind and a certain sense of fulfillment.
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