THE 50-30-20 MONEYPLAN – PART II
SAVE AT LEAST 20% OF TAKE-HOME INCOME
WHY SAVE? THE POWER OF COMPOUND INTEREST
We now move on to the next major component in the 50-30-20 MoneyPlan: saving at least 20%
of take-home income. This is extremely beneficial over the long run because of the power of
compound interest (or “return” as it is called with stocks, and more generally). You might
already be familiar with the destructive power of compound interest: the interest charged on your
credit card debt keeps that debt growing and growing, often to the point where the debt becomes
so high that you cannot possibly pay it off. In this situation compound interest is working for the
benefit of the credit-card issuer. Here, however, we want to look at how compound interest can
be a benefit to YOU.
But remember that the key to being able to save at least 20% of take-home income to limit your
fixed expenses to less than 50% of take-home income. Otherwise those fixed expenses will eat
into your ability to save.
It is very difficult when your budget looks like this:
So strive for a 50-30-20 budget, that makes savings possible and easier:
Saving money is important for several reasons:
1. Provides funds for emergencies and unexpected expenses.
2. Helps you reach your financial goals.
3. Gives you a feeling of security.
It is amazing how powerful saving can be. Even people with very modest incomes can eventually
become millionaires – even adjusting for inflation – as long as they start early and save steadily
and consistently year in and year out. If you save just $100 per week in a balanced diversified
stock fund like the Wilshire 5000 and it ends up earning its historic average return of