Some people are better at saving money than others. Those who are good savers generally know how to live within their means, and they tend to keep their living expenses low compared to their earnings. Those who aren't natural savers, by contrast, tend to fall into the trap of spending most, if not all, of their income on their basic needs. And then there are those who truly go overboard, spending more money than they bring home and racking up debt in the process.
No matter your age, it's important to start saving money for things like retirement, emergencies, and major life goals such as buying a home. Creating a budget can help you manage and keep track of your living expenses so there's money left over to help you meet your savings targets.
Taxes
The first rule of establishing a budget is figuring out your take-home pay. Remember, your salary is notthe amount you take home. If your job pays you $60,000 a year and you're in the 25% tax bracket, then you'll pay about $10,800 in taxes on that income, leaving you with $49,200. That's about $4,100 a month that you can put toward living expenses and savings. (Note that your tax bracket, also known as your marginal tax rate, is not the rate you pay on all your income. Your effective tax rate is generally much lower. See this article for more details.)
Housing
Housing is generally the average person's greatest monthly expense. It's best to keep your housing costs as low as possible, but under no circ*mstances should you allow more than 30% of your take-home pay to go toward housing. If you're a homeowner, that 30% includes not only your mortgage payment, but also your monthly property tax and homeowners' insurance payments as well.
The 50/20/30 rule
When creating a budget, you can list each and every monthly expense you incur as its own line item, or you can combine some of your expenses and follow what's known as the 50/20/30 rule. The benefit of the 50/20/30 rule is that it groups certain expenses together to make your budget easier to track. The 50/20/30 rule splits your living expenses into three main categories:
- Fixed costs that stay the same month after month, such as your rent or mortgage, car payment, and cable bill. Fixed costs should take up 50% of your income.
- Variable costs that can change from month to month, such as entertainment, groceries, and clothing. Variable costs should take up 30% of your income.
- Savings, which should take up 20% of your income
The 50/20/30 rule allows you to retain some flexibility in your budget while saving a nice percentage of your income. While you can always adjust these percentages to accommodate your circ*mstances, limiting your fixed costs to 50% of your income should leave you with enough money left over to save and cover your variable expenses. Along these lines, allocating 30% of your income to variable costs means you'll have a decent amount of wiggle room within that category alone.
Identifying essential costs
A big part of saving money is learning to distinguish between essential and non-essential living expenses. Essential living expenses are non-negotiable; you simply can't function without them. Examples include housing costs, auto insurance, and food. Non-essential living expenses include restaurant meals and fancy electronics, which may be nice to have but aren't necessary. Limiting your non-essential living expenses can help free up more of your income for more important things, like savings.
Growing your savings
Once you distinguish between your essential costs and those that are "wants" more than "needs," you can work on making changes that allow you to build your savings. While the majority of your income will probably go toward your living expenses, make sure your budget leaves you enough room to save money as well. Your first savings goal should be to put together an emergency fund with enough money to cover three to six months' worth of expenses. From there, you should work on saving for retirement. Many financial experts recommend saving at least 10% of your income for retirement, and the sooner you begin, the more time you'll have for that money to grow. You may start off by saving a small sum each month and increasing that amount gradually, but the key is to make saving a priority regardless of how much money you earn.
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FAQs
How do you figure out a budget? that works for you. We recommend the 50/30/20 system, which splits your income across three major categories: 50% goes to necessities, 30% to wants and 20% to savings and debt repayment.
Is 40% of my income too much for rent? ›
Spending around 30% of your income on rent is the golden rule when you're trying to figure out how much you can afford to pay.
Is it bad to spend 50% of income on rent? ›
Spending more than 50% of your income on rent isn't recommended, as you'll be living paycheck to paycheck. You won't be able to save or invest money for the future. If you're currently overspending on rent, solutions include raising your income, finding more affordable housing, or getting a place with a roommate.
What is the 70% money rule? ›
The rule states that you should allocate 70% of your income to monthly rent, utility bills, and other essential needs to improve your financial well-being. 20% of your income should go to savings. The remaining 10% can go towards your investments or to debt repayment.
What is the 50 30 20 rule of money? ›
Key Takeaways. The 50/30/20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split between savings and debt repayment (20%) and everything else that you might want (30%).
What is the 60 20 20 rule? ›
If you have a large amount of debt that you need to pay off, you can modify your percentage-based budget and follow the 60/20/20 rule. Put 60% of your income towards your needs (including debts), 20% towards your wants, and 20% towards your savings.
Is it OK to spend 35% of income on rent? ›
A popular standard for budgeting rent is to follow the 30% rule, where you spend a maximum of 30% of your monthly income before taxes (your gross income) on your rent. This has been a rule of thumb since 1981, when the government found that people who spent over 30% of their income on housing were "cost-burdened."
Is it OK to spend 30% of income on rent? ›
How much should you spend on rent? It depends. One popular guideline is the 30% rent rule, which says to spend around 30% of your gross income on rent. So if you earn $3,200 per month before taxes, you could spend about $960 per month on rent.
Is 30% of income on rent too much? ›
There are a few ways to ballpark how much you should spend on rent. The 30% rule says no more than 30% of your gross monthly income. The 50/30/20 rule says to allocate 50% of your income to necessary expenses, including rent. But you may need to apply a more holistic approach to reach a number you are comfortable with.
What is the 50% rent rule? ›
The 50% rule or 50 rule in real estate says that half of the gross income generated by a rental property should be allocated to operating expenses when determining profitability. The rule is designed to help investors avoid the mistake of underestimating expenses and overestimating profits.
A December 2023 report by Zumper, a privately owned rental platform that links landlords and renters, found the median rent for a one-bedroom and two-bedroom rental was $1,499 and $1,856, respectively. Here's a look at high and low rent prices Zumper found in the four U.S. regions.
What percentage of income should go to housing Dave Ramsey? ›
Figure out 25% of your take-home pay.
To calculate how much house you can afford, use the 25% rule we talked about earlier: Never spend more than 25% of your monthly take-home pay (after tax) on monthly mortgage payments. That includes your mortgage principal, interest, property taxes, home insurance, PMI and HOA fees.
What is the 40 40 20 budget rule? ›
The 40/40/20 rule comes in during the saving phase of his wealth creation formula. Cardone says that from your gross income, 40% should be set aside for taxes, 40% should be saved, and you should live off of the remaining 20%.
What is the 7% rule money? ›
The seven percent savings rule provides a simple yet powerful guideline—save seven percent of your gross income before any taxes or other deductions come out of your paycheck. Saving at this level can help you make continuous progress towards your financial goals through the inevitable ups and downs of life.
What is the 40 30 20 10 rule? ›
The most common way to use the 40-30-20-10 rule is to assign 40% of your income — after taxes — to necessities such as food and housing, 30% to discretionary spending, 20% to savings or paying off debt and 10% to charitable giving or meeting financial goals.
Is the 28 36 rule realistic? ›
Since lenders look at a variety of factors, the 28/36 rule isn't necessarily a hard-and-fast mandate. When you consider how much property values have increased in recent years, even wages have stagnated, the rule may feel unrealistic.
How much house can I afford if I make $70,000 a year? ›
Assuming a 20 percent down payment on a 30-year fixed-rate loan at an interest rate of 7 percent, you can afford the payments on a $240,000 home, according to Bankrate's mortgage calculator.
Is the 50 30 20 rule after taxes? ›
The basic idea of the 50/30/20 rule is simple. You allocate 50% of your post-tax income to “needs” and another 30% to “wants.” That leaves you with at least 20% of your net income that you're able to save or use to pay down existing debt.
Can I spend 40% of income on mortgage? ›
The 28% / 36% rule is based on two calculations: a front-end and back-end ratio. As we've discussed, this rule states that no more than 28% of the borrower's gross monthly income should be spent on housing costs – but it also states that no more than 36% should be spent on total debt costs.
