Learn How to Save and Maximize Your Money with This Simple and Effective Financial Trick

 

The 50-30-20 Rule of Saving: Maximize Your Personal Finances

Introduction to Personal Saving

Building substantial personal wealth through investments is achievable, but saving is a prerequisite. Without initial savings or capital, investment is impossible.

What is Personal Saving?

Personal saving is simply the difference between our income and our expenses: "Income - Expenses = Savings." Therefore, when saving, we must consider these two elements (income and expenses).

Sources of Income for Better Saving

In terms of income, it can come from:

• Employment:

• Salaries from employment

• Professional income from self-employment

Another source of income can be capital-derived, mainly from:

• Interests

• Dividends

• Rentals

How to Increase Your Income

To increase the capital flow from employment, one must work more hours or secure a raise. For self-employment income, investments can help, but as mentioned, investments require prior savings.

Effective Strategies for Reducing Expenses

The primary measure to increase savings is expense reduction. Expenses can be divided into discretionary and essential. Based on these principles, to save, we must eliminate all discretionary expenses. Discretionary expenses are those not essential for survival or basic well-being, such as entertainment, subscriptions, dining out, impulsive shopping, vacations, and personal status-enhancing expenses.

The 50-30-20 Rule Explained

Introducing the concept of expenses, in personal finance, there is the 50-30-20 rule to set maximum limits for each type of expense.

Essential expenses should not exceed 50% of one's income. If a person's essential expenses surpass 50% of their income, they need to reassess their expenses by either increasing their income sources or cutting down on lifestyle-related costs (e.g., living arrangements, children's education).

On the other hand, discretionary expenses should not exceed 30% of income. This should theoretically be the easiest part of the "exercise" since, being discretionary, reducing them shouldn't be too difficult.

Achieving 20% Savings: A Key to Financial Success

So, if 50% represents essential expenses and 30% represents discretionary expenses, what does the remaining 20% represent? The remaining 20% represents savings. This rule encourages the reader to save up to 20% of their income consistently. If an individual cannot achieve this 20% savings, they must first cut discretionary expenses and then reduce essential expenses.

Conclusion

Understanding and implementing the 50-30-20 rule can significantly impact your financial health. By effectively managing income and expenses, and prioritizing savings, you can build a solid foundation for future investments and financial stability. Start applying these principles today to see a positive change in your personal finances.