One surefire way to get started saving money to invest is by following the 50/30/20 rule, which divides your after-tax income into three categories.
The 50/30/20 rule breaks down into these three categories:
To get started, you’ll need to determine your take-home income, which is what’s left after your employer deducts your taxes and Medicare and Social Security costs. If your paychecks aren’t already taxed (often as with freelancers, for example), you’ll need to determine how much take-home income you’d have after putting a percentage of your paychecks away to pay for taxes down the line. Once you know exactly how much money you’re earning after taxes each pay period, you can break down the 50/30/20 percentages of that number.
Allocating 50 percent of your income to necessities, 20 percent for savings and investments and 30 percent for wants might feel like an impossible feat. But, again, building healthy habits (and breaking dangerous old ways) is key.
Your necessities should consume half of your income, which means that you can set aside 50 percent of each paycheck to pay for things like your rent, your car loan, your commuting costs to the office, your phone bill, your groceries, your insurance premiums, your minimum credit card payments and other necessary expenses. And, sure, you have to cover these costs — but there are most likely ways you can cut some of them down.
For example, you need to shop for groceries each week but you can shop smartly by choosing cheaper products, actually applying those coupons you always toss, and cutting back on items you could do without or that never seem to last anyway. Maybe it’s time to shop around for a more affordable health insurance plan or start carpooling to work to split costs. Your minimum credit card payment is also a must, but ask yourself if it needs to be so high next month — what of your wants are costing you more than you’d care to admit?
You can allocate 30 percent of your income to your wants, which means that you can spend a healthy chunk of each paycheck on expenses like dinners, shopping and travel. There’s ample room for improvement here.
How much money could you save yourself if you started making your coffee at home each morning instead of picking it up from a cafe? (Probably hundreds every month.) Likewise, how many smartphone apps that you seldom open still quietly charge you each month? Do you really need new shoes this month, or can you wait until next month when you promise that you won’t rack up your utilities bill?
We’re not saying to starve yourself of your wants; rather, we’re saying that you can still get your fix in more clever, financially feasible and sustainable ways.
Once you’ve covered all of your necessary costs and have paid for whatever it is that you wanted, you can invest what’s left of your paycheck (which should amount to 20 percent of your income!). Maybe that’s only a few bucks for now, but it’s still something. Plus, you can probably bank on your salary ultimately increasing over time, so don’t sweat it so much right now.
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