Many financial strategies list savings as an afterthought, focusing on spending first. This can lead to a mentality of “saving what’s left,” which often leaves little left to save. Here’s why flipping the script and prioritizing savings with the 20-15-65 rule can be a powerful approach:
A Mindset Shift: Savings First
Traditional budgeting methods often place saving as the final step after allocating for spending needs and wants. The 20-15-65 rule flips this approach, prioritizing savings and investments upfront. This shift in mindset emphasizes the importance of building wealth for your future.
Let’s Break it Down:
Imagine you earn $10,000 per month. Here’s how the 20-15-65 rule would work:
- 20% for Savings: Allocate $2,000 directly towards savings goals, building a financial safety net and laying the foundation for future investments.
- 15% for Investments: Dedicate $1,500 towards investments, allowing your money to grow over time and reach long-term goals like retirement.
- 65% for Everything Else: This remaining $6,500 covers all your needs and wants (combined). This may require adjustments to your lifestyle.
Needs vs. Wants: A Flexible Approach
The 20-15-65 rule doesn’t strictly separate needs from wants. Instead, it encourages you to re-evaluate both categories based on your current financial situation. The goal is to free up more money for saving and investing by identifying areas where you can cut back.
Taking Action with the 20-15-65 Rule:
Continuing with our example, let’s say your current spending habits include:
- Rent: $3,000
- Groceries: $1,000
- Social life: $1,000 (drinks with friends)
Under the 20-15-65 rule, you’d need to find $1,500 in savings within this category. Maybe that means cutting back on nights out, opting for more home-cooked meals, or finding cheaper entertainment options.
Building Wealth, Not Just Saving:
By prioritizing savings and directing a portion towards investments, the 20-15-65 rule encourages you to grow your wealth for the future. This strategy goes beyond just saving what’s left over – it’s about actively building financial security and achieving your long-term goals.
Remember, a healthy financial future starts with a shift in mindset. By prioritizing savings and investments with the 20-15-65 rule, you can take control of your finances and pave the way towards a more secure future.
Use this calculator to check your monthly expenses to see how much is the minimum that you need to save.