The 50/30/20 Rule How Much Should You Have in Savings


Everyone has different goals and financial situations. But we all need money to live comfortably in retirement. The sooner you start saving for your future, the quicker youll arrive at financial independence.

Discover the recommended approach of savings, saving money by following the widely endorsed 50/30/20 rule. In this blog post, we’ll delve into whether this method aligns with your savings goals and how it can help you achieve financial security.

Financially speaking, 2020 has been a major wakeup call for most people. In a recent study, about one-third of respondents claimed to have lost 10 to 25 percent of their income due to the COVID-19 pandemic, while 9 percent lost all of it.

The situation has cast fresh light on the importance of saving. As the pandemic has proven, life can come at you quickly, and so it pays to be prepared.

Right now, there are a lot of people who wish they had put more in emergency savings when they had the opportunity instead of spending it.

At the same time, there are many young people who were well-prepared going into the pandemic and the resulting downturn. This winter, Bank of America revealed that nearly a quarter of people between the ages of 24 and 41 who save had more than $100,000 socked away. According to the study, nearly three-quarters of millennials were saving for life milestones, such as down payments for home purchases.

That said, I want to help you get into the latter group: the people who take saving seriously. As the saying goes, the best way to start saving is to simply do it.

The first question that comes to mind is, how much of my paycheck should I save?

Its a question that we all agonize over, largely because most of us arent properly taught how to save — or how to think about saving — in school. Most people graduate, enter the workforce, and are left to fend for themselves. And sadly, most build haphazard financial strategies based on other peoples opinions and goals — not their own.

In this post, Ill provide you with some information and tips to help you benchmark your financial progress, with the understanding that you are a unique individual with your own set of lifestyle and financial goals. Ultimately, the onus is on you to build your own accumulation of wealth. Nobody else can do it for you.

Ready? Lets begin.

How Much Should You Have in Savings?

Most financial experts will advise you to use the 50/30/20 rule as a general savings model and to have enough money saved to cover three to six months worth of expenses.

The 50/30/20 Rule Says You Should Allocate:

  • 50 percent of your budget on short-term expenses like food, rent, utilities, student loans, and car insurance
  • 30 percent of your income should go toward things like entertainment, vacations, and gifts.
  • 20 percent of your income should go to your savings

With the 50/30/20 rule in place, if you make $60,000 after taxes:

  • $30,000 would go toward daily spending
  • $18,000 would go toward discretionary spending
  • $12,000 would go in your savings fund

Is the 50/30/20 Rule Realistic?

The 50/30/20 model doesnt make sense for everyone. In fact, it can be downright impossible for some people.

For example, suppose you pay $1,400 in rent — or $16,800 annually — which is the U.S. average (well pause here so our New York City readers can compose themselves). That only leaves you with $13,200 to spend on utilities, maintenance, student loans, or credit card payments — making it difficult to justify putting $12,000 in the bank.

After all, it may look good on paper. But in reality, you dont want to be the person telling your friends you cant meet them for drinks or a night at the movies because youre saving for retirement.

If you cant live with the idea of saving 20 percent of your earnings, and 10 to 15 percent is a more realistic goal, use that as a starting point. As a general rule of thumb, the trick is to try and keep your expenses as low as possible. That way, as you earn more income, you can incrementally increase your savings by storing away any extra money that you have.

One tip that you can use is to try and catch yourself spending money in ways that are frivolous and could be avoided. For example, the next time you want to spend $30 on pizza and wings, go to the grocery store and try and put together a meal for $10 or $12. Then immediately transfer the money you would have otherwise spent on fast food into your savings account. At the end of the month, treat yourself to something fun as a reward.

How to Determine a Savings Goal Thats Right for You

Chances are, the last few paragraphs may have struck a chord in some way. Maybe you thought, Live without pizza delivery? Take a hike, dude. Or maybe you thought, Thats easy — I am basically a hermit and cook all my own meals already.

The point is, you know your personal finances better than anyone. Only you can determine how much you should be putting in the bank without being miserable.

If theres one thing I cant stress enough, its to look out for your future self and be prepared for any curveballs that could drastically affect your financial situation. In all likelihood, the person you will become 10 years from now will not be the same person that you are today. You and your family may someday wish you had set aside more earnings and let it grow over time.

Just to play devils advocate, you may also look back and wish you had taken that trip to Barcelona before you settled down.

So, my advice is simple: Know thyself. Take out your notebook and spend a few minutes jotting down who you are and who you want to become. Then build a savings goal that aligns with your current and future needs.

Winning the Long Game

Millennials often get a reputation for spending money with abandon. Yet, while boomers love criticizing young folks for blowing their income on things like gourmet acai bowls or avocado toast, the fact is that millennials are surprisingly prepared for retirement.

As one recent study found, millennials are actually better savers than Gen Xers and boomers. The majority of millennials start adding to their retirement savings at 24, compared to Gen Xers and boomers, who start at 30 and 35, respectively. Millennials also contribute about 10 percent to their retirement funds or investment accounts, compared to Gen Xers, who contribute about 8 percent.

The problem is that many young Americans are relying on an outdated, unrealistic, and unhealthy retirement model that has them retiring at 55 or 60 with no real plan as to how they want to spend their golden years.

Again, flash forward in time and picture your future self. Is your idea of retirement sitting by the pool all day, waiting for an early bird special? Probably not.

Thats a recipe for losing your faculties at an early age and dying young.

Re-thinking Retirement with FIRE

In the age of disruption, it comes as no surprise that theres a better approach to retirement than waiting until youre a senior citizen to call it a career.

Instead of defining retirement as the age where you stop working forever, think of it as the moment where you stop working to make money and start doing what you love. For some people, that may be sailing around the world on a boat and fishing in exotic places. For others, it may be starting your own business.

In either case, this strategy involves putting aside enough to retire early so that you can enjoy your retirement while you are still young and healthy.

Youve heard me say a million times that retirement isnt an age—its a financial number, says Dave Ramsey. Theres no law that says you have to work until youre 65. Thats a myth.

Ramsey is a big proponent of the financial independence, retire early (FIRE) movement — a strategy that involves sacrificing superficial wants, saving as much income as possible, investing it so that it can grow over time, and then using that money to live the life of your dreams.

Most experts tend to place this figure at around 25 times your annual income. So, if you make $50,000 per year, youll need somewhere in the ballpark of $1,250,000 to achieve true financial independence. However, this could be significantly lower or higher, depending on your career, lifestyle, and financial goals.

Ultimately, the two biggest factors at play are time and the total amount of income that you are willing to save. If your average savings is only around 5 percent of your income, it will take you 67 years to retire. However, if you save 90 percent of your income, you can do it in 19 years.

Financial independence is something that I was able to achieve, and you can too — if thats what your goals are.

So, lets light a FIRE under you — and explore some of the ways that you can put your money to work.

Three Types of Savings Accounts to Explore

Now comes the challenging part: figuring out where to park your money. Here are some of the best short-term savings options to consider.

Money Market

A money market is like a short-term savings account with higher interest rates than traditional savings accounts. These accounts typically have higher minimum balance requirements, but provide more potential upside than run-of-the-mill accounts.

It is not advisable to put more than the FDIC-insured limit of $250,000 in a money market account at any given time. The best way to approach a money market investment is for secure, limited growth — a sprint, not a marathon.

High Yield Savings Accounts (HYSA)

One of the drawbacks of using a money market account is that, in most cases, your money will be tied up for however long you have it in there. So, if you open a six month certificate of deposit (CD), for example, you will have to keep it in the account for the duration of the time, or you could face penalties and fees for trying to access it.

A high-yield savings account (HYSA) is an online savings account that typically offers a higher interest rate of a money market account while giving you direct access to your cash at all times. Examples of HYSAs include:

  • American Express Personal Savings
  • Capital One
  • Marcus by Goldman Sachs

Each of these offers competitive HYSA programs with interest rates that are currently hovering around 1.30 percent. The only real downside is that a HYSA will come with a variable rate that fluctuates with the market. It wasnt too long ago when rates were upwards of 2 to 2.5 percent, for example. Still, HYSA interest rates tend to be 20 to 25 times higher than a traditional savings account.

A HYSA, like a money market fund, should only make up part of your overall portfolio. Use this as a flexible way to keep money on hand so that you can watch it grow while maximizing earnings.

Learn More:

  • Best High Yield Savings Accounts

Rewards Savings

One type of savings account to consider for short-term financial holding is a rewards savings plan. This is useful for daily expenses, like paying bills or making ATM transactions. Most rewards savings accounts work in conjunction with checking accounts.

Rewards savings programs typically offer annual savings bonuses, savings matches, relationships rewards like ATM fee rebates, or cash bonuses for new savings accounts.

Again, this is not where you should park the majority of your money. Think of it as an alternative to an HYSA, with more incentives to save.

How to Approach Long-Term Savings

All serious long-term savings should be funneled into low-risk, high-return investment vehicles like stocks, bonds, and real estate.

Your first move should be to open a 401(k) plan if your employer offers it or explore an individual retirement account (IRA) or Roth IRA. Focus on maximizing your individual contributions and then look into taxable brokerage or mutual fund accounts to supplement additional savings if possible.

Heres one piece of advice: You should never feel tethered to a 401(k) plan. You can refuse a plan and fund your own retirement using an IRA. Or, you could roll your existing plan into another employers 401(k) program. Know your options and make the move thats right for you.

Its also worth considering a health savings account (HSA) for both short- and long-term financial savings. Funds parked here can be stored tax-free, and can be used to pay for qualified medical expenses that youll no doubt accrue over your life. This is a great strategy for people with high deductible plans, and it comes with great tax benefits.


Should I Consider Life Insurance?

If you have a family or are thinking about starting a family, you should consider life insurance so that you can protect your loved ones when you eventually pass away. Life insurance is cheaper to buy when youre young, so if you can afford it, it could make sense.

As you look for options, make sure you explore universal and whole life insurance plans. These types of insurance policies can provide you with living benefits, replacing or supplementing income as you age. The tradeoff is that loans and withdrawals typically decrease the death benefit of the policy.

Is it Possible to Save Too Much?

It is impossible to save too much money over time. However, it is possible that you could be saving too much money annually. Again, consider your lifestyle and financial goals, and decide whether the FIRE system is right for you or whether you would rather save conservatively, and retire later in life. Only you can make that choice.

Do I Need Long-Term Savings if I Expect an Inheritance?

If you are fortunate enough to have a trust fund or any type of inheritance coming, you should still save like you would without it. Any number of unfortunate events could happen down the road, like an unexpected job loss, a legal snafu, or a poor financial decision that leaves you with less than you expected.

Ignore the inheritance and save as you would without it to be safe.

How Does the Pandemic Impact Savings?

The pandemic is just one disaster that you will face in your lifetime. Use it as a learning experience and as a way to build a bulletproof investment plan. If you lost all of your income, and are now unable to save, focus now on diversifying your income streams moving forward. Get a part-time job or start a side hustle. Most importantly, dont let anything derail your savings plans.

How Many Americans Have No Savings?

Its disturbing to note that 70 percent of Americans have less than $1,000 in savings. And 45 percent have nothing saved at all — putting them at serious risk. Even if youre just starting out, remember: Saving even a small fraction of your income is much better than the alternative.

How Much Does the Average Person Have in Savings?

This tends to vary largely by age and household type. Across all segments, the average American has about $8,863 spread across a credit union or bank. People who are 34 and younger have an average of $4,727 in savings. And those between the ages of 35 and 44 have about $10,399 put away. Older Americans, between the ages of 55 and 64, have an average of $17,587 in savings.

Should I Save If Im In Debt?

If youre in debt, the best thing that you can do is pay it off — and quickly. Credit card debt is the number one wealth killer, and unfortunately, its easy to get in way over your head.

In the U.S. average consumer debt per capita is now hovering around $12,687. And when the pandemic is said and done, this is bound to be even higher. Negotiate payments if you have to, or get a second — or even a third — job, and put aside whatever is left over after your bills are paid. Then, get serious about building a long-term savings plan.

Start Saving for Your Financial Future Today

Everyone has different goals and financial situations. But we all need money to live comfortably in retirement — even though we all have our own visions of what retirement looks like.

The sooner you start saving for your future, the quicker youll arrive at financial independence. Put together a plan that works for you and stick to it, and youll do just fine.

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