There’s a lot that goes into personal finance. For a lot of young twenty-somethings, it’s difficult to even begin thinking about a budget. Between your rent, student loans, groceries, utilities and phone bill, your money just goes away as soon as you get it. How can you begin to think about finances when you’re just trying to make ends meet?
Well, here’s one way to think about it that might help you frame your budget: the 50/20/30 rules. It’s fairly straightforward, and it’s a good rule of thumb to base your finances on. So, what is it?
When you get your paycheck, set half of it aside for essentials. Essentials are things you can’t avoid paying for. That means food, gas, utilities and the like. This category doesn’t include things like eating out at nice restaurants or getting new video games, as essential as those things may be to your mental health. No, this category specifically deals with things you need to spend money on to either stay alive or keep making money to keep staying alive.
While fifty percent may seem high, this is a pretty good bar to set for your necessities. If half of your pay doesn’t cover all of your necessities, it’s time to look for a better job or try to get a raise.
Savings is a pretty broad category and can refer to a ton of different things. For example, if you have outstanding debts or a retirement fund, this applies to both. Whereas 50 percent was a max for the previous category, 20 percent is about how much you should already have set aside when your check comes in for savings. If you’re saving less than 20 percent of your check, you need to cut back on personal spending.
Neglecting to save into rainy-day funds, savings accounts and retirement accounts can cause you serious problems down the road. While these things might not seem immediately pressing, they become a big issue in a few decades. The sooner you start saving, the more your savings can compound on themselves and make your life easier down the road.
While some things have a fine distinction between personal and necessary spending others are a bit less clear-cut. Things like cell phone bills were once considered a luxury, but for most people they replace landlines and allow access to the internet.
However, things like gym memberships, weekends with friends and the like easily fall into this category. These are things you should absolutely spend on, but make sure to keep it under 30% of your budget! Start living by this plan and you’ll likely find your finances turning around pretty fast!