It is always best to prepare your finances for rainy days. Unexpected events may occur and we are often tempted by our wants. Other than daily expenses, we often aim to travel or to go on a shopping trip. With the high cost of living in Singapore, it can be rather difficult to save money in Singapore. However, we still need to maintain good spending habits and set an appropriate budget.
There are many ways to save money and better manage your finances. But one of the best methods is the 50-30-20 rule. The rule advocates that you spend 50% or less of your income on necessities like food, 30% on personal expenses like Netflix subscriptions, and 20% on long-term goals such as saving and retirement. It is a budgeting rule that is applicable to all adults and even students.
It’s good to ensure you are getting the most out of what you earn. Sometimes seemingly small decisions affect your spending and saving patterns in the long run. In this article, we take a look at one of the most recommended budgeting and saving rules—the 50-30-20 rule.
What is the 50-30-20 rule?
The 50-30-20 rule is a simple budgeting rule to help people reach their financial goals. This rule helps with saving money in Singapore. It stipulates that you should allocate your after-tax income as follows:
- 50% needs
- 30% on wants
- 20% should go into savings.
In simple terms, 50 % of your income after deduction of tax should go towards important needs and obligations. The remaining half should be split between 20% for savings and debts and 30% for everything else you want. This rule of thumb helps to make sure you utilize your entire income wisely.
Where did the 50-30-20 Rule Come From?
The 20-30-50 rule was coined by a Harvard professor in her book, All Your Worth: The Lifetime Money Plan. It was meant to help working-class families manage their money and prepare for the future.
How does the 50-30-20 rule work?
The 50-30-20 will help you manage your money, limit how much you spend, and encourage savings. Most people don’t keep track of how much they save. Here is how the rule works.
1. Calculate your monthly income.
Add up all the income you receive each month. If you have a retirement plan, add that back to the after-tax income. The retirement portion will be part of your savings.
Calculate how much should go into each category. After totaling your earnings, compute the 50%, 30%, and 20%. This will give you an idea of how much should go into each category.
2. Plan your budget.
Create a budget and categorize your expenses. List all the expenses and add the amounts in each category. See where you need to make adjustments.
Follow the budget. This is likely the challenging part. We are always tempted to by our wants but to increase our savings, try not to sway from your budget. Track your expenses to ensure you can follow the rule. Keep adjusting your expenses until you can live within the stipulated rule.
3. An example of a 50-30-20 rule scenario.
Assume that you have an income of $2,500, after CPF deduction. You can then plan your budget according to this $2,500.
Divide your total take-home pay into various categories.
- 50% of $2,500 is $1,250
- 30% of $2,500 is $750
- 20% of $2,500 is $500
With the 20-30-50 rule, you know that you can spend up to $1,250 on food/rent, $750 on your needs such as the latest AirPods, and put away $500 for your savings.
What are Your Needs in Budgeting?
Needs are the things you will require to survive, and you must pay for them. They are the ‘must haves’. Half of your after-income should go towards your needs. After analyzing and calculating the needs, you should ensure you are not spending more on this category.
Needs include the following:
- Mortgages and rent
- Car payments
- Insurance and healthcare
- Basic utilities
- Minimum loan repayment
- Childcare expenses
It’s important to note that how you categorize the various expenses may differ from one person to the next. Review the expenses and see in which category they fit best.
What are Your Wants?
Wants are expenses that are not essential. That means you can do without them. Wants are the extras that make life more interesting. They include the following:
- Monthly subscriptions (Netflix, Dsieny+)
- Entertainment, such as tickets to sporting events or music concerts
- Dining out
- Latest electronic gadget
The things that fall in this category are optional. Most upgrade decisions are wants. For instance, buying a Mercedes instead of a more economical car may be considered a want.
What are Your Savings in the 50-30-20 Rule?
Savings is defined as money set aside for investment or future use. Start by building an emergency fund, which is money to sustain you for a period in case of unemployment. After building the fund, come up with short-term and long-term savings goals and work towards achieving them.
As you build your savings, you need to decide where to keep your funds. The best option is to place your money where it will earn interest. Look for investment opportunities where your money will earn you more money.
How do you Build Your Savings in Singapore?
The first step towards building your wealth starts by setting some money aside every so often. Here is how you can start your savings journey.
1. Make it a habit to save.
The first major step towards saving is making it a habit. As they say, practice makes it perfect. At the beginning, it may not be possible to save huge amounts of money. Start with those short-term goals that don’t require a lot of money. ’
This will help you make it a habit to save. Save small regular deposits and, with time, you will be able to build up your savings. Every cent counts.
2. Create a budget & track
You need to know where your money goes, and the best way to know where it goes is by coming up with a budget. As earlier stated, categorize your expenses. By doing this, you will see where you need to adjust.
Within no time, you will be able to set aside part of your earnings. Once you get the hang of it, increase your monthly savings.
3. Set short-term and long-term investment objectives
Start by coming up with short-term investment goals. Having goals will help you know how much you need to save. When you achieve your short-term objectives, you will be motivated and confident to pursue your long-term objectives.
Automate your saving process.
Choose the best savings account and automate the saving process. The best way to save money is to automate your saving instructions such as implementing GIRO to your savings account. Modern banking makes it possible to set up instructions to deposit money directly into your savings account. Set up recurring instructions and save them automatically.
4. Clear your debts
If you have debts, you need a strategy to clear them. They will hinder your saving journey, and you need to devise a strategy on how to clear them fast. Start by clearing high-interest debts and consider debt consolidation.
5. Increase your revenue streams
A new income stream will increase your chance of saving money. Increase your input. Engage in other income-generating activities to increase your income. For instance, if you are an engineer in Singapore, consider giving tuition over the weekends for some side income.
Direct the money you make from the additional income stream towards savings.
5 Easy Tips to Save Money in Singapore
Money issues can be stressful, hence the need to create a management and saving culture. When you need money urgently, it can cause you stress and affect your work performance. Here are some practical ways to help you save money.
1. Track where the money goes
The most important step towards saving is finding out where the money is going. You will know where it is going by tracking your expenses. When you know where the money goes, it’s to adjust.
To ensure consistency, invest in an expense tracker. You will be able to see where the money goes. There are also free expense trackers that can be found on App Store and Google Play Store. Maybe you need to reduce the number of times you dine out. Cut out unnecessary expenses. It may not look like much, but on paper, it could add up to a good amount.
2. Keep an eye out for bargains
Do a little research and look for discounts. Look for meal deals when you dine out. Look for group deals where you can take advantage of a one-for-one deal. Buy durable items in bulk and get discounts.
For example, there are always monthly promotions at NTUC or on Shopee online.
3. Go green to save money on energy.
As we spend more time indoors due to the pandemic, consider going green to save on electricity. Choose energy-efficient appliances to help reduce your electricity bills. Look for alternatives such as energy-saving LED lights to keep the electricity bills low.
Turn appliances off when not in use. Wear a sweater instead of turning on the heater. Look for ways to lower your electricity bills.
4. Put money aside in high-interest savings accounts
Make your money work for you by saving it in high-interest saving accounts. Research and find the best savings account where your money will earn interest. The more you save, the more you will earn.
You can also consider high-yield rate products to help you grow your savings. Look at money markets.
5. Stick to the 20-30-50 rule
Make sure you follow the budgeting rules and save your money. It can be difficult to stick to the savings goals but pull all your muscles and stay true. Look for budgeting tools to help you manage your finances.
Other money-saving ideas to consider:
- Pack your lunch instead of buying
- Set specific saving goals.
- Top up your CPF and retirement accounts to earn tax relief.
- Pay off your debts first.
- Consider a staycation to save money.
- Cancel unnecessary subscriptions.
- Negotiate for discounts.
Start Saving Early With the 50-30-20 Rule
In conclusion, the 50/30/20 rule is a great way to help you save money. By allocating 50% of your income to essential expenses, 30% to discretionary items, and 20% to savings or debt repayment, you can make sure that you are making the most of your money. It helps you identify what you really need to spend your money on and what you truly do not need. For readers who are already caught in a financial pinch, let U Credit help you create a fresh start.
Try it out for yourself and see how much easier it is to stay on track with your finances. Trust us, with good budgeting, your future self will thank you.