A guideline for budgeting for young adults.
As I write this blog post, a quick disclaimer — I am not a wealth guru! I have been self employed via a small product design and creative technology studio for the last 5 years (check us out, we do cool stuff). One of the key skills in staying self employed and enjoying a decent quality of life is financial management.
Making a budget is more than just paying your bills on time — a budget is also about determining how much you should be spending, and on what. The 50/20/30 rule is a proportional budgeting guideline that can help you keep your spending in alignment with your savings goals.
I won’t lie to anyone, the world of personal finance is super complicated however the 50/20/30 rule can help twentysomethings or older ages navigate their way through the complexity. Generating wealth is unsexy and it is actually a long term game. Don’t get caught in the fast money lifestyle, you want to enjoy your wealth in your 60's.
This is a guideline to follow so it may be subjective to your consequences and that’s cool. The 50/30/20 can benefit your life greatly, if you follow the simple principles set forth by this budgeting system.
50% of Your Income — Essentials
To begin abiding by this rule, set aside no more than half of your income for the absolute necessities in your life. This may seem like a high percentage (and, at 50 percent, it is), but once you consider everything that falls into this category it begins to make a bit more sense.
To be clear, your essential expenses are those you would almost certainly have to pay, regardless of where you lived, where you worked, or what your future plans happen to include. In general, these expenses are nearly the same for everyone and include rent/mortgage, food, transportation costs (every month I cry) and utility bills. The percentage lets you adjust, while still maintaining a sound, balanced budget. And remember, it’s more about the total sum than individual costs.
For instance, some people live in areas where rent is higher but may walk everywhere, while others enjoy much lower rent costs, but transportation is far more expensive.
20% of Your Income — Savings
The next step is to dedicate 20 percent of your income toward savings. This includes savings plans, debt payments and rainy-day funds. That’s a bit of an oversimplification, but hopefully you get my gist. This category of expenses should only be paid after your essentials are already taken care of and before you even think about anything in the last category of personal spending.
A suggestion could be to think of this as your “get ahead” category. Whereas 50 percent of your income is the goal for essentials, 20 percent — or more — should be your goal as far as circumstances allow. You would pay off debt quicker, and make strides toward a frustration-free future by devoting as much of your income as you can to this category.
The term “retirement” might not carry a sense of urgency in your twenties, but it certainly will become more pressing in decades to come (the self employed should definitely take note of this).
Just keep in mind the advantage of starting early is you will earn compounding interest the longer you let this fund grow.
30% of Your Income — Luxuries and desires
The last category, and the one that can make the most difference in your budget is the unnecessary expenses that enhance your lifestyle (subjective). Some financial experts consider this category completely optional, but many of these luxuries have taken on more of a mandatory status. It all depends on what you want out of life, and what you are willing to sacrifice. The reason that this category accounts for a larger percentage than your savings is because so many things falls into it.
These personal lifestyle expenses include items such as your mobile phone contract, Sky/Virgin media bill and trips to Costa or Starbucks. Other components of this category include gym memberships, clothes, weekend trips and dining out with your friends.
You may actually see these things as a necessity rather than a luxury. Only you can decide which of your expenses can be designated. Similar to how no more than 50 percent of your income should go toward essential expenses, 30 percent is the maximum amount you should spend on personal choices.
The fewer costs you have in this category, the more progress you’ll make in acquiring wealth and securing your future.
Try this out for three months and let me know if this guidelines works for you. I am interested in hearing your thoughts and critiques of this budgeting guideline. My twitter is @fxfegha and my email is email@example.com.