How the 50-30-20 rule can help you build a savings habit

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Budgeting and saving money may seem challenging — but the 50-30-20 rule is an easy way for people to get started, said Cathy Curtis, a certified financial planner based in Oakland, California.

The numbers refer to the share of take-home pay allocated to different areas of your life: 50% of a paycheck for necessities, the “must have” items such as food, housing and transportation; 30% to discretionary spending, the “wants” category, which might include entertainment, travel and shopping; and 20% to saving and paying down debt.

When using the 50-30-20 rule, you should “pay yourself first,” said Curtis, founder of Curtis Financial Planning and a member of CNBC’s Advisor Council. In other words, set aside the 20% for savings and debt immediately, and then budget the remainder for needs and wants afterward. Automate that savings where possible.

Even if you can’t save 20%, set aside something — even if it’s just 1% — to start building a habit and develop positive feelings about your money, Curtis said.

“Saving [for the future] is as important as every other expense you have,” she said. “Do it no matter what.”

If you don’t, it might mean not having enough money to fund your lifestyle later in life, perhaps even living in poverty, Curtis said.

How to prioritize saving and paying down debt

When choosing how to allocate 20% of your paycheck for savings or debt repayment, it’s important to consider how costly the debt is, Curtis said.

In other words, does your loan carry a low or high interest rate?

If low-interest debt — perhaps 6% or less — Curtis recommends splitting the 20% evenly between savings and paying down the debt. If high-interest — such as credit card debt — use most or all of that 20% to first pay down that debt, she said.

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Financial advisors generally recommend having an emergency fund to cover unexpected expenses, in addition to other savings such as money for retirement. High-yield savings accounts offered by online banks are generally among the best places to park that cash, since they generally offer quick access and a decent interest rate.

A Roth individual retirement account is also a flexible way to save and invest money, Curtis said. Your contributions can be withdrawn any time without penalty — making Roth IRAs good emergency funds and also retirement funds that grow and compound over time, Curtis said. Roth IRAs may not be available for those with higher incomes due to income limits.

Those who need help choosing how to invest can leverage a low-cost “robo advisor” such as Wealthfront, Betterment or Charles Schwab, Curtis said, which develop an automated investment program based on your risk tolerance.

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