In her book, All Your Worth, Senator Elizabeth Warren discusses how you should be
divvying up your monthly paycheck in order to ensure you are covered for the
future.
·
·
50 percent or less should go to your essentials (your recurring
expenses: rent, utility, grocery, and transportation to and from work).
·
20 percent to the future: emergency fund, retirement, paying down
debt (credit cards,
loans).
·
30 percent to your wants: your leisure activities (going out to
dinner, shopping, travel).
For example, if you are making $35,000 a year ($26,340 after
taxes), you net $2,195 a month (under the assumption you are single, living in
NYC). So under our 50/30/20 rule here is the breakdown:
1.
50 percent for your essentials equals $1,096 for groceries, rent,
utilities, transportation, etc. WOW! That isn’t very much. This shows that when
you’re starting off you may need to tweak your spending percentages a little if
this does not seem realistic—or think about a roommate.
2.
20 percent for future savings equals $439 and also must be
allocated for any payments on credit cards you owe or balances on your student
loans. You need to set the amount you will be paying per month based on a
percentage such as this one; if you have a large student loan, you may need to
increase this percentage.
3.
30 percent for wants equals $659. This is a fairly large number
and can be scaled back until you establish yourself a little more or once you
have saved a little nest egg.
It’s important to note that these percentages are listed in
order of importance. Your essentials are what need to be covered first; if
these are not a priority then you will have no place to live, no food and no running
water. These expenses come before anything else.
Second, when looking toward funding your future, you may
have to funnel a large part of that
percentage toward paying your debts. It makes sense that the longer you take to pay
off your debts, the more it will cost in interest. The most important thing
about loans is to pay them off ASAP—you don’t want that debt burden hanging
over your head for too long.
If you are fortunate to have no debt when you graduate, you
can think about putting the full 20 percent of your monthly earnings in your
401(k) or other investments. If you graduate with lots of student debt, your
goal should be to live modestly, but this should be true anyway. You may need
to sacrifice some of your “wants” in order to retire these loans and escape the
burden of living in debt.
Third in your list of priorities are wants. Remember, we work to live; we shouldn’t live to work!
The trip to Miami for the weekend, the drinks with your girlfriends after work
and the bottomless mimosa brunches on Sundays are all “wants,” even though we
may sometimes argue a weekend of R&R is a need.
Tailoring this spending during times when you do not have as
much disposable income is very important. Fresh out of college, you will most
likely not be living like you were.
Expenses pile up each month and part of being an adult means
you learn to budget and accept that maybe you can’t go out and get drinks EVERY
night (unless you make friends with a bartender).
Learning
to budget in this way will make you savvy and much more cognizant of
how much you are actually spending. Devoting $659 each month for whatever you
want may seem like a lot, but when you actually break down how much you are
currently spending, it will shock you how fast it goes.
Another thing that will surprise you is how much your
“essential” life costs. You’ll want to break down your recurring fixed expenses
and your weekly incidental purchases, such as visits to the grocery store. Then you will have a better idea of how much you will need
to budget. Some people eat less than others, therefore your grocery bill is
less; however, you may have expensive monthly prescriptions you have to fill.
Another allocation you may like to make would be that for charity. If you have leftover “want “ money and have already
invested some in retirement, etc., a nice place for the excess could be
charities.
The worst thing you can do is NOT be prepared, NOT know how
much you’re spending because it either scares or overwhelms you to think about
it and you would rather be naïve. This is the painless way to become more
aware. You are not the only one going through this transition period and that’s
what it is: a transition. This is not permanent.
Through your life, you will get higher-paying jobs as you
become more experienced and become more of an asset to your employer, and with
that you can amp up your lifestyle. For now, be smart and learn to be savvy.
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