Here Are 3 Simple Steps To Start Saving 20% Of Your Income

There is no denying that the cost of living has skyrocketed and income is trying to catch up, albeit in snail-pace. But the disparity between income and cost of living is not that great that it is impossible to survive.

Perhaps, we should do some self-reflection and look at our finances to figure out how we can cut and trim to match our current cost of living. We can’t have it all – buying our first home and shopping every weekend, something’s got to give.

So, how do you do it? What can you sacrifice and what do you spend on? Here I break down budgeting in the easiest way for you, and show you how you can benefit from it:

The 50/30/20 budgeting method

We can’t say it enough times: Don’t spend more than what you earn! And the best way to do that is to keep track of what you spend.

One simple way of keeping track of your money is through percentage budgeting. It is a simple and straightforward concept – instead of allocating fixed amount to every line item, you establish a target percentage for each expense category.

One guideline that we like to use for percentage budgeting is the 50/30/20 rule.

Here’s the breakdown:

NEEDS 50% Bills and fixed expenses such as rent, mortgage, basic groceries, etc.

WANTS 30% Dining out, entertainment, vacations, etc.

SAVINGS 20% Retirement, down payment for a new home, child's education, etc.

1. Needs – 50%

Fixed costs mostly consist of essential expenses, and it makes up half of your income.

For an average 20-something, fixed expenses are usually made up of rent (if one is not staying with his/her parents), groceries, phone bill, an internet subscription, car loan (if one owns a car), monthly commuting expenses, insurance premium and more.

Needs – 50%

Nett income	RM3,500 a month
50% for fixed expenses	RM1,750
• Room rental	RM600
• Utilities	RM120
• Mobile phone bill	RM90
• Internet subscription	RM140
• Groceries	RM400
• Commuting expenses	RM200
• Student loan repayment	RM200
Total fixed expenses	RM1,750

However, if you’ve listed down all your needs and they come up to more than 50%, it’s time to take a hard look at your expenses. Perhaps you can downgrade your phone or internet subscription, or even sell your car and turn to public transportation.

The beauty of a budget is, you will immediately identify where the problem areas are and you can make adjustments in your finances.

2. Wants – 30%

Allocate no more than 30% of your take-home pay toward wants.

These are expenses that you do not necessarily need, but are nice to have, such as eating out, shopping, hobbies and entertainment.

To determine your how much you can spend on wants, first deduct your fixed costs and financial goal contributions from your income. This way, you’ll know that the balance for wants is truly yours to spend however you want.

Wants – 30%

Nett income	RM3,500 a month
30% for flexible expenses	RM1,050
• Eating out weekdays	RM200
• Eating out weekends	RM150
• Shopping/ entertainment	RM250
• Food delivery	RM100
• Streaming services	RM150
• E-hailing (instead of public commute)	RM200
Total fixed expenses	RM1,050

This category will require you to exercise discipline in order to be on track. If you have splurged on a nice dinner with your friends, then you will need to cut your spending elsewhere. Perhaps, by preparing your own lunch for the next few days, or forego paid entertainment for the month.

The key here is to ensure the overall spending allocated for wants does not exceed 30% of your nett income.

3. Savings – 20%

This refers to savings you’re setting aside for emergencies and to reach your financial goals. Not sure what your financial goals are? Ask yourself what do you want in five, 10, 20, and 30 years down the line? How do you envision your retirement?

Financial goals are not set in stone, and should be reviewed every few years. However, having a rough goal will help you work towards achieving them.

If you allocate 20% of your income for your goals, you will ensure that your finances will be on track to reach your target.

Assuming you start with RM3,500 nett income per month, and on average you get a 5% salary increment every year. Here’s how 20% of your nett income makes a difference:

Year	Monthly salary	Total savings	Financial goals
1	RM3,500	RM8,400	You would have saved RM15,000 within 1.5 years for your Europe trip.
2	RM3,675	RM17,700
3	RM3,859	RM28,000	You would have saved about RM52,000 for the down payment of your first home (RM520,000)
4	RM4,052	RM39,400
5	RM4,254	RM52,000
23	RM10,750	RM692,000	You would have saved RM692,000 for your children’s college education.
35	RM19,306	RM1,978,600	You would have saved up a sizeable retirement fund to supplement your EPF savings.

* Assuming 6% per annum average returns.

Though this budgeting method sounds simple enough, it takes some discipline to stick to it. And it does not work like a miracle where your finances will improve and your debts will disappear overnight. You still need to work hard to make an sustainable impact on your finances.

The most important thing about budgeting is, it should be personalised to your lifestyle and spending habits. This budgeting rule serves as a guideline to lead you towards the right direction. Once you have an idea on how a balanced budget looks like, you can create your own budget to achieve your financial goals.

 

This article has been updated on September 17, 2024.