In the journey towards financial stability, it’s essential to have a clear strategy for saving and investing your hard-earned money. The ‘20% savings rule’ is one popular guideline that has gained traction in the realm of personal finance. Born from the idea of consistent and mindful savings, this rule offers a simple yet effective approach to securing your financial future.
Understanding the 20% Savings Rule
The 20% savings rule suggests that individuals should strive to save at least 20% of their income. This rule acts as a practical benchmark, aiding in the creation of a savings habit that supports both short-term needs and long-term goals. For instance, if your monthly income stands at £2,500, the rule advises setting aside £500 each month as savings.
The concept of saving a portion of one’s income is not a new idea and has been advocated by financial experts for many years. While the specific “20% savings rule” might not have always been explicitly mentioned, the general idea of saving a certain percentage of income has been a fundamental principle of personal finance advice for decades.
The “pay yourself first” concept, which involves saving a portion of your income before spending on other expenses, has been a cornerstone of financial literature for a long time. This concept aligns with the essence of the 20% savings rule.
Implementing the Rule
Putting the 20% savings rule into practice involves a few key steps:
1. Measure Your Income
Begin by assessing your total monthly or yearly income. Include your salary, wages, and any consistent inflows of money.
2. Determine 20%
Calculate 20% of your net income. For instance, if your monthly income amounts to £3,000, your 20% savings target would be £600.
3. Allocate Savings
Endeavour to allocate the calculated 20% towards various savings goals. These may encompass an emergency fund, retirement accounts like a workplace pension scheme or a personal pension, investments, and other aspirations.
4. Consider the 50/30/20 Rule:
This is a percentage-based budgeting method that extends the principle of 20% savings and can help you manage your money monthly. The idea is that you make a basic plan for your income after tax every month, aiming to:
- Spend 50% of your net income on essential ‘needs’
- Spend 30% on ‘wants’
- Save the remaining 20%.
There’s a good summary of it provided by the Co-Operative Bank.
5. Tailor to Your Budget:
Create a budget that outlines essential expenses such as rent/mortgage, utilities, groceries, and transport costs. After accounting for these necessities, make sure you can comfortably set aside 20% for savings.
Adaptation of the 20% Savings Rule to Individual Circumstances
It’s important to note that personal finance advice is often shaped by the economic landscape, prevailing interest rates, and the overall financial climate. While the core concept of saving a portion of income has remained relatively stable, the recommended percentage might have been adjusted over time to reflect changes in economic conditions.
While the 20% savings rule provides a strong foundation, it’s important to recognise that personal financial circumstances also vary widely. For those with lower incomes, or higher essential expenses, a rigid adherence to this rule might not be feasible. Flexibility is key; adapt the rule to suit your unique situation while maintaining a focus on consistent savings.
Additionally, cultural and societal changes can influence how people approach saving and investing. Changes in technology, accessibility to financial information, and shifts in retirement planning can also impact how people interpret and apply savings guidelines.
The 20% savings rule serves as an accessible blueprint for building a secure financial future. By adhering to this guideline, individuals can cultivate a savings habit that supports their aspirations and safeguards them against unforeseen challenges. Remember, this 20% savings rule is a starting point – customise it to your needs, consider other financial goals, and watch as your prudent savings pave the way for lasting financial well-being.
As ever, I have numerous other blog posts on the topic of saving.
And finally, for help and advice about this 20% savings rule, or any savings needs, contact me for professional advice.