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Managing personal finances can often feel overwhelming and complicated. The amount of money you should save each month varies based on your goals.
Your ideal savings rate depends on your specific, long-term reasons for saving.
But what if there was a simple rule that could help you navigate your income and expenses?
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The 50-30-20 rule suggests dividing your after-tax income into three categories— needs, wants, and savings.
Do not subtract other amounts that may be withheld or automatically deducted, like health insurance or retirement contributions. Those will become part of your budget.
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Needs are those bills that you absolutely must pay and are the things necessary for survival. Essentials like housing, utilities, transportation, groceries, and healthcare fall under the "needs" category.
These are the expenses required to maintain a basic standard of living. Aim to allocate around 50% of your income to cover these necessities.
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Wants are all the things you spend money on that are not absolutely essential. Such as your netflix subscription, dining out, vacations, hobbies, and shopping.
It's important to enjoy life and indulge in things you love. So try to allocate around 30% of your income towards fulfilling these desires.
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The remaining 20% of your income should be dedicated to savings, which includes building an emergency fund, investing for retirement, paying off debts, or saving for future goals like buying a house or starting a business. This portion helps secure your financial future and grants you peace of mind.
As a general rule of thumb, you should have at least 3 to 9 months of emergency savings on hand in case you lose your job or an unforeseen event occurs. After that, focus on retirement and meeting other financial goals down the road.
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Saving is difficult, and life often throws unexpected expenses at us. By following the 50-20-30 rule, individuals have a plan with how they should manage their income.
Your savings and wants can be different depending on your own situation and what you want to achieve financially.
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IDEAS CURATED BY
CURATOR'S NOTE
Finance management is important, without which we will always struggle no matter how much money we make.
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