How much money you should budget as part of your income is always up for debate. The popular 50/30/20 rule that was developed by Senator Elizabeth Warren says you should spend 50% of your income on essentials like your mortgage payment, rent, utility bills. 30% should be spent on discretionary spending like dining, shopping, entertainment. Lastly, 20% is for financial goals like paying off debt and saving for retirement.

Saving 20%

The 20% savings is not as simple or easy for some people, it is good to target if you can save this much. The 20% rule was established to easily set you up to have a shot at having financial independence before you get too old.

The 20% does seem high for most people, so It’s good to save at least 10% for retirement and this gives people an easier number to work with. Another rule of thumb is to save at least 25x your annual gross salary to achieve true financial independence.

What does financial independence mean? This means that you can sustain your current lifestyle or one you have chosen from your current investments. To judge this, it is good to use the common 4% rule, which says that you can withdraw 4% of your investments every year and this will meet your yearly spending indefinitely.

Even though these are common rules, you don’t need to stress about saving this much if you can’t. Saving something is better than saving nothing. A good way to start is to start small, at 1% of your income. If this doesn’t hurt or cause your stress, then you can continue to increase this by 1% point. If you reach a point where you’re saving a lot and you’re stress, then you should scale back a little on your savings. This is a process that you get comfortable with over time.

It’s always good to have the 20% goal in your mind and it will keep you disciplined. It is also a good strategy to increase your savings when you get a raise or when you pay off your entire debt. Paying off debt is essentially savings in reverse and can use that additional income to put towards savings.

Making a Budget

The first time you make a budget and see where all your money is going, it opens your eyes to your spending habits. A lot of your spending is due to mindless spending that you are not aware of.

Your budget does not need to complex. It can be very simple as making a grocery list so you don’t impulse buy or having all your travel expenses budgeted out.

With your budget, make sure you have a plan for your money. This plan is a good way to monitor your progress. My favorite way to hold yourself accountable is to start a personal diary. In this diary, you can write down the goals you would like to achieve and your daily progress. This is a good way to hold yourself accountable to your plan.

The most important lesson from this is to always save and no amount is too small. How much to save varies from person to person, but always have a plan and set a goal and a date to attain that goal.