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If you want to save with a defined objective or are simply one of those people who can’t put money aside, then you’ll like to know some savings formulas that you can start putting into practice today.
Created by specialists, these success formulas consist of practical and simple-to-apply rules that help to systematize savings and improve your relationship with money.
5 infallible savings formulas
Creating good savings habits is the first step towards having a stable and trouble-free financial life. But as with everything in life, there are rules.
And when we go by tried-and-true formulas that have proven to be effective for many other people, then saving money can become a less burdensome task.
It doesn’t matter if you’re looking to buy a car or a house, or if you’re just looking to better control your family budget. By establishing parameters, these savings formulas help you determine what you can spend and how much you should save, depending on your goal.
Formula 50/30/20 – For those who want to control the family budget
If you’d like to save more, but find it difficult to establish limits between what you spend and what you put aside every month, the 50/30/20 formula may well be the solution you’re looking for for balanced management of the family budget.
By applying this rule, you can divide into three parts the destination to give to your monthly income.
This formula determines maximum percentages for spending (essential and non-essential) as well as a minimum percentage for saving.
50% must be earmarked for essential expenses
Essential expenses correspond to fixed expenses, those that you really cannot escape and that have to be covered every month.
This type of expense includes housing expenses, such as rent or payment of home loan installments, as well as expenses with food, fuel for the car, passes, telephone, internet, electricity, water and gas.
30% for non-essential expenses
Attention. 30% is really the maximum amount that, according to this formula, you can spend on clothes in restaurants, movies, concerts, trips and other leisure activities. That is, in everything that is not fixed. And you can adjust these expenses depending on the money you have, as long as it does not exceed 30% of your income.
20% to save
If the previous percentages represent maximum amounts for expenses, the last value of the 50/30/20 formula represents a minimum amount.
Thus, 20% is the minimum amount of your monthly income that must be allocated to savings. That is, there is 20% of your income that you should not spend.
For example, if you earn 1,500 euros a month, 300 euros should not come out of your pocket except for an emergency fund, a term deposit, or any other savings instrument of your choice.
Formula 20/4/10 – For those who want to buy a car
Having goals is half the battle for not losing focus and continuing to be motivated to save.
The 20/4/10 formula is indicated for those who have a very specific objective: to buy a car.
The added value of applying this formula when considering the purchase of a car, especially if the purchase is made on credit, is to avoid excessive debt.
20% for entry
The formula says that 20% of the value of your new car must come out of your account. That is, the entry fee, which is paid with your own financial resources, must be 20%.
Therefore, if you are considering a car that costs 20,000 euros, you must pay at least 4,000 euros out of your pocket.
Loan term: 4 years
According to this savings formula, your car loan must be for 4 years or less. Why? So as not to suffer too much from the effect of interest.
When applying for a loan to buy a car, a percentage of your monthly installment corresponds to interest. This interest can lead to debt and this danger increases with time and with the taking out of other credits.
10% for current expenses
Fuel, maintenance, insurance, parking or garage expenses must not exceed 10% of your monthly income.
Formula 28/36 – For those who want to buy a house
Are you thinking about buying a house? So most likely you will need to apply for a home loan. If that’s the case, you’ll like this savings formula, whose objective is precisely to understand how much money you can spend on the mortgage.
Applying the 28/36 formula you will know exactly how much of your income can be spent on expenses related to the house and what is the limit for your remaining debt.
28% of income must be used for household expenses
In this savings formula there are only two numbers to take into account.
One of them is 28. This number corresponds to the percentage of your budget that should be allocated to fixed expenses related to your home. These expenses include the monthly payment to the bank, interest, taxes and insurance.
36% is the debt ceiling
According to this formula, your total debts, with the exception of those related to housing, should not exceed 36% of your budget.
These debts relate to all monthly car responsibilities, installment payments for purchases, credit cards or consumer credit, for example.
10% Rule – For those looking to save for retirement
According to this rule, you should allocate 10% of your monthly budget to saving for retirement.
Ideally, you should prepare for the end of your active life in advance in order to ensure a supplementary pension to what you may receive from social security.
You have different options for doing so, from Retirement Savings Plans, PPR funds to retirement certificates. The sooner you start, the better. More money will capitalize.
Rule of 72 – For those who want to capitalize on their savings
Since we are talking about capitalization, the objective of this formula is precisely to help you to capitalize your savings.
The formula or rule of 72 tells you how many years it takes to double your savings, through the magic formula of compounding.
Why 72? Because someone did a lot of math and found that the percentage of interest times the number of years it takes the initial principal to double is approximately 72.
How does it apply?
The formula for the rule of 72 is as follows:
- 72 / Interest rate = Number of years required to double capital
That is, to know the number of years needed to double the money you have in the bank, in deposits, capitalization insurance, bonds and others, just divide the number 72 by the interest rate you receive for these investments.
Article originally published in December 2020. Last updated in March 2023.