Foundations of a Strong Budget: Part 5 – Building the Habit of Saving
Over the past few weeks, we’ve explored the foundations of budgeting: separating needs from wants, identifying when wants are disguised as needs, and using the 50/30/20 framework to create balance. Now it’s time to look more closely at the last piece of that ratio: savings.
Why Savings Matter
In the 50/30/20 model, 20% of your income goes toward savings. But have you stopped to ask yourself: How much am I saving from each paycheck right now?
The 20% goal became popular when Elizabeth Warren, a law professor and now U.S. Senator, introduced it nearly 20 years ago in her book All Your Worth: The Ultimate Lifetime Money Plan.1 Since then, the financial landscape has changed dramatically. We’ve experienced a Great Recession, housing market swings, student loan burdens, stagnant wages, and a growing list of “new essentials” like cell phones, internet, and streaming subscriptions. For many, 20% may feel unrealistic.
That’s why some recommend a more attainable 60/30/10 approach, where 10% goes toward savings. Whether you aim for 20% or start with 10%, the important thing is this: make saving a consistent part of your life.
Start Small, Build the Habit
The amount you save is important, but the habit of saving is even more critical. You’ve probably heard the phrase “pay yourself first.” It’s timeless advice. We work hard for our money - why should we pay everyone else before we pay ourselves?
If 20% feels out of reach, start with what you can:
- Begin with 1–2% of each paycheck.
- Aim for 5% as soon as possible.
- Gradually increase as your budget allows.
The more often you save, the more natural it becomes. Watching your balance grow is motivating, and as your account earns interest, you begin to see your money working for you. That momentum can inspire you to keep going.
The Four Spending Cycles
To understand why paying yourself first matters so much, let’s look at the four major spending cycles:
| 1 | Earn → Spend → Earn → Spend Living paycheck to paycheck, with no savings. |
| 2 | Earn → Spend → Borrow → Spend Relying on credit to cover shortfalls, which creates debt. |
| 3 | Earn → Spend → Save Savings exist, but only after spending, and often inconsistent. |
|
4 |
Earn → Save → Spend |
Most of us spend time in the first three cycles. Even when we intend to save, it often takes a back seat to spending. The goal isn’t to leap straight to Cycle 4 overnight. It’s to begin moving toward it, however small the step.
Why This Works
Savings give us security, flexibility, and peace of mind. They prepare us for emergencies, fund future goals, and make wants more enjoyable because we can afford them without guilt or debt. Whether you’re saving 2%, 10%, or 20%, the key is to start and to keep going.
Coming Up Next
In Part 6, we’ll explore where to put your savings. From emergency funds to retirement accounts, we’ll look at the different types of savings vehicles and how to make them work for you.