You're making good money, and it's easy to want to blow that whole paycheck. But we'll show you a simple rule that will allow you to live large and get your financial house in order too.
If you went into finance for the love of pulling 15-hour days, more power to you. But if working in anticipation of that fateful day in February when your bonus hits your bank account, let’s just say that you aren’t alone.
When your monthly paycheck arrives, you might get stars in your eyes. You forget about that massive student loan and nagging credit card bills. Suddenly bottle service every weekend seems like a great idea. Who doesn’t love those sparklers? If you’re not careful, those morning hangovers could have a lasting effect on your bank balance. Here’s a quick crash course in how to divide up your earnings like a boss—ahem, managing director so that you can still afford the life you want without busting your budget.
Let’s discuss some general guidelines, which make up what we like to call the 50/20/30 Rule:
50% Should Go Toward … Essentials
At LearnVest Planning, we define essentials as the stuff you need to live, so cocktails with co-workers don’t count. This category includes housing (e.g. rent on your swank digs or mortgage payments), transportation, utilities and groceries.
So you should aim to spend no more than half of your take-home paycheck—that’s after taxes—on these things. In other words, if your rent is equal to 45% of your take-home pay, then you should probably look elsewhere.
20% Should Go Toward … Financial Priorities
Are you working in finance to save money for what you really want to do? Do you have your eye on buying the Soho apartment that will keep you in the city forever? These all fall into the financial priorities category—along with those crippling student loan payments. Bottom line: At least 20% of your take-home pay should be set aside to reach your major financial goals and pay off your debts faster.
30% Should Go Toward … Lifestyle Choices
This is the money for shiny things. After you’ve paid for the essentials, and set aside money for financial priorities, you should aim to use no more than 30% on whatever else your heart desires. This includes—but is not limited to—happy hours, work clothing, travel, takeout and HBO.
Don’t Think This Can Work?
Yeah, we hear you. Especially those of you who are laboring under large student loan payments that make up 20% of your paycheck alone. Here’s what you need to keep in mind: The 50/20/30 Rule is a broad guideline, so you might have to tweak it to line up with your individual situation.
Notice how we said at least 20% on financial priorities, and no more than 50% on essentials. So if you have big loan payments, you may have to get a roommate or pass up this season’s share house to make it work. And note that even if your debt repayment is bordering on 20%, you also need to be saving for emergencies and retirement!
Why It May Be Time to Call in a Pro …
To get you on the right track—i.e. paying down that student loan debt in a manageable way, while also saving for that Soho apartment or that 5-bedroom house in Westchester—you need advice on budgeting and building out a 5-year plan. Lucky for you, LearnVest Planning offers fee-based financial services for a fraction of the average monthly gym membership that you’re not using .
The opinions expressed in this article are that of LearnVest Planning Services, a registered investment adviser. The advice provided may not be suitable for your individual situation and you should discuss your situation with a financial professional.