When it Comes to Saving Money What is a Good Rule of Thumb?

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You know you must save money. If you don’t, you’ll never have the wonderful feeling of financial freedom. You could be working until the day you die. And who in their right mind would relish that prospect?

According to statistics from the U.S. Bureau of Economic Analysis, people in the United States are saving an average of less than 8% of their disposable income. That’s not going to buy you a comfortable retirement. In fact, a rule of thumb is that you should be saving between 10% and 15% of your income for retirement. And that doesn’t include saving for your other financial goals.

Of course, this isn’t the only savings rule. In this post, you’ll learn the seven most important rules of thumb for saving money.

To Save, You Must Budget

The more you save, the wealthier you will be. Of course, you also need to live. And this means spending money on necessities and lifestyle. The secret to saving more is to budget effectively. This will help you avoid overspending, as well as to reduce debt and find the money to save more.

Budgeting is a habit that must be learned. The first step is to make a budget from scratch.

We recommend following these seven steps to keep your budget focused on your financial goals:

  • Step #1: Set your financial goals.
  • Step #2: Predict your income based upon your last six months’ income.
  • Step #3: Predict your expenses (necessary and discretionary) based upon the last six months’ expenses.
  • Step #4: Calculate your savings rates (minimum savings rate is income minus all spending, maximum is income minus necessary spending).
  • Step #5: Evaluate your financial goals against your spending.
  • Step #6: Track your savings every month.
  • Step #7: Track your net wealth regularly to monitor progress toward your financial goals.

No matter how good your intentions, sticking to a budget can be difficult. It’s easy to get tempted by retailers’ tricks and spend money on impulse. You need discipline to stick to a budget. To help you keep to your spending limits, always remind yourself why you are budgeting before every spending decision you make,


  • Think about the actual cost
  • Consider the opportunity cost (what could you have done with this money?)
  • Think about the hidden cost (what the money you are about to spend could be worth in the future

Another difficulty is that you must track your spending to be successful at budgeting. Fortunately, there are many tools and apps to help you budget, track your spending, and accelerate toward your goals. We’ve detailed some of these in our post 10 Best Budgeting Apps for Personal Finance. These include:

  • YNAB (You Need a Budget), which is a great tool to connect your bank accounts and see your transactions in real time, as well as receive suggestions to help you eliminate debt.
  • Mint, which alerts you when your bill payments are due, helps to track investments, an synchronizes your financial data.
  • Mvelopes, which is designed to help set goals to eliminate debts.

For savers and investors, our favorite tool is Personal Capital. This is a free app that helps you track your spending and target saving and investment. You can connect and track your long-term investments – like your 401(k) – as well as your savings accounts, credit cards, loans and mortgages.

For budgeting, the Personal Capital app will help you understand how you are spending money by categorizing your spending. And tracking your net worth couldn’t be easier – the calculation is done for you.

Another cool feature is that Personal Capital offers a wide range of additional investment resources, such as financial planning and investment checkups.

Using these financial tools to help you budget will help you stick to our second savings rule of thumb.

What’s a Good Percentage to Put into Savings? The 50/30/20 Savings Rule.

The 50/30/20 savings rule makes allocation of your money easy.

It simply says that of your earnings you should allocate:

  • 50% to necessities (like rent, utilities, food, etc.)
  • 30% to discretionary spending (like entertainment and takeaways)
  • 20% to saving and investment

This rule takes the effort out of budgeting and balances your obligations and impulses with your financial goals. However, it doesn’t account for your earnings and the cost of living where you do. 50% may not be enough for necessities if you are on a modest salary but live in a high-cost location.

Best Money Saving Apps


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6 More Rules of Thumb to Help You Save More

One rule of thumb is never enough. Your personal circumstances mean you need to be a bit savvier, so that you ‘bend’ the rules a little to suit you. These six further financial rules of thumb will help you build the flexibility into your budgeting and saving that will accelerate you toward your financial goals.

1. Maintain an Emergency Fund

Build up and maintain an emergency fund of six months of your spending on necessities. If you lose your job, this financial cushion will give you the time to find another suitable position, instead of being forced to accept the first offer that comes along to avoid losing your home.

This can be difficult to achieve, especially if you are starting from scratch and have other priorities, such as reducing debt and investing for your future on top of high daily costs of living.

When saving an emergency fund, tailor to your own needs by considering:

  • Your income
  • Access to other money
  • Your monthly expenses
  • How much you could trim your spending in a financial emergency

Remember, too, that your emergency fund should be held in an accessible account. This will avoid penalties on withdrawal, though you won’t earn as much interest as you would if you tied your money up for a longer period.

2. Pay off Your Credit Card Debt First

According to Debt.org, the average American household owes $8,398 in credit card debt. This means that, at an average interest rate of 16.97%, the average American family is paying around $1,425 in interest on their credit cards each year.

Credit card debt is the most expensive debt that most people own – and you should always pay off your most expensive debt first. You’ll pay less in interest, and therefore have more money to pay off other debt faster.

3. Save 10% of Your Income toward Retirement

This is a common rule of thumb for your retirement pot. It gives a clear number to work with and is simple to put into action. Open a retirement account like a 401(k) and set aside 10% of your earnings. You’ll be saving tax-efficiently, and your employer may also contribute.

The problem with this rule is that it doesn’t consider how much you will need when you retire, nor does it account for when you wish to retire. If you want to retire sooner, you will need to save more. If you wish to maintain a high and expensive standard of living, you will need more money.

Therefore, it may be best to save a minimum of 10%, but also base your retirement savings on how big your retirement pot needs to be to pay for your desired retirement lifestyle. To do this, calculate what your costs will be in today’s terms, and multiply by 20. This figure is used because it assumes your fund will grow at 4% during retirement, or that you could withdraw 4% each year for at least 20 years.

Once you have calculated the fund size you need, you can calculate how much you need to invest toward your retirement (Read our post How Can Investors Receive Compounding Returns & Retire with a Million Dollars? to learn more.)

4. The 50/15/5 Rule

This rule keeps things simple and is a variation on the 50/30/20 savings rule.

You allocate:

  • 50% to essential expenses
  • 15% to investment toward retirement
  • 5% to short-term savings for your emergency fund

The other 30% is used for other spending and saving. However, as your circumstances change over time, your priorities will change. A new home, marriage and children will alter your spending needs, and this could make it difficult to maintain the financial discipline to stick to this rule of thumb.

5. Pay Yourself First

Have you ever wondered why the government takes your tax money before you see a penny of your earnings? It’s so they are guaranteed their money. You should do the same. Treat your savings pots like the taxman and pay yourself first, on the day you receive your paycheck.

Having set your financial goals and budget, saving first will ensure that the money you know you must save toward your financial goals is put to one side. You’ll soon get used to not having that money available, and this will help you resist the temptation to spend what you should be saving.

6. Cut Your Expenses

Of all our rules of thumb, this may be the most decisive. The lower your spending, the more you will have available to save. This may be easier than you think. Our post How to Drastically Cut Expenses provides details on the seven most effect ways to reduce your monthly costs:

  1. Refinance your car or home loan
  2. Lower the cost of your food
  3. Get a roommate
  4. Learn to thrift and pass on designer clothes
  5. Opt out of luxury services
  6. Use a financial health app, like Personal Capital
  7. Sell your car

If you can cut your expenses by just $100 per month, and pay yourself first by saving that money instead, you could be on your way to retiring as a millionaire. And guess what? Most people can reduce their spending by way more than $100 per month.

What Is the Typical Relationship between Time and Interest Rate?

The longer you save, the higher the interest rate you are likely to receive. This is because the institution you save with has more time to use your money to make money for themselves.

The same relationship exists when you borrow money – the longer the term of credit, the higher the interest rate you are likely to be charged. The scales are tipped against you when you borrow money, and in your favor when you save.

There is one certain way to rocket your savings, and that is to benefit from compounding interest. Instead of taking your interest or dividend when it is paid, you should reinvest it. You earn interest on the interest, and as the interest paid builds up your earnings increase.

Here’s the difference compounding interest makes:

  • Let’s say you invest $1,000 and receive 5% interest each year for 20 years
  • Without compounding, you will receive $1,000 in interest
  • With compounding, you will receive $1,653 in interest – more than 60% more!

So, when It Comes to Saving Money, What Is a Good Rule of Thumb?

When it comes to saving, there is no single rule of thumb. There are many. For them to be effective, you must shape them to your unique circumstances. It’s important to take an all-round approach to budgeting and saving:

  • Reduce debt
  • Spend wisely
  • Save more

Your efforts will be rewarded, as you retire earlier and live a life of financial freedom, in which you can help others enjoy their lives equally.