My son recently graduated and is starting his first professional job. After years of being a college student, he feels flush. As he begins to establish his new adult life, I realized he needed some budgeting guidance. How much is a reasonable amount to spend on rent? Can he afford that new car? How much should he put into savings and/or retirement? How much should go toward paying off student loans? Establishing a reasonable budget that keeps you living within your means is the difference between financial disaster or financial paradise.
An easy way to determine where your money should be spent is using the 50/30/20 budget rule. This breaks down your monthly expenses into needs, wants and savings/debt. Using your monthly income (after taxes), 50% should go toward expenses like housing, utilities, food, transportation, insurance, servicing of existing loans, and childcare. 30% of your income can be spent on wants. Wants are the extras that aren’t essential to living and working. These may include clothes, dining out, streaming subscriptions, travel and entertainment. The remaining 20% should be dedicated to paying off debt and growing savings. Depending on your situation, this can include starting and growing an emergency fund, contributing to your retirement plan and paying off any existing credit card debt.
As with any rule, be flexible. Everyone’s circumstances are unique. If you have a lot of debt to pay off, you may consider adjusting your ratios to 45/25/30. If you live in a high rent city, your ratios might look like 55/25/20. The key is to never spend more than you earn and to try to keep that last number at 20% or higher. Paying off debt is always a better decision than splurging on wants. By establishing a budget following the 50/30/20 rule or your adjusted version, you can enjoy your new adult life, while being confident that you are also ensuring a bright financial future.
As a final note, creating a budget is the easy part. Adhering to the budget is the hard part. There are all sorts of apps to help you. By tracking your expenses, you
- will learn about your spending habits allowing you to prioritize your spending to maximize progress toward your goals.
- help prevent debt which restricts your spending power in the future. The more debt, the more of your income must go toward interest payments and the less you will have for the fun stuff.
- create wealth over time giving yourself true financial freedom- whether it’s finally buying that house or dream car, changing careers or retiring early.
It is never easy to be disciplined and it may not be fun, but it is very powerful to be in control of your future.
Mario Hernandez has been a Certified Financial Planner (CFP) for over 30 years and brings a vast amount of experience in the financial planning and investment management business. Through Longevity Wealth Management, Mario provides holistic planning services that help clients find solutions to live their best life. Mario’s email address is mario@longevitywealthmanagement.com. Securities offered through Osaic Wealth, Inc. member FINRA/SIPC. Investment advisory services offered through Longevity Wealth Management. Osaic Wealth, Inc. is separately owned and other entities and/or marketing names, products or services referenced here are independent of Oasic. Certain insurance products are offered by Mario Hernandez as a licensed agent independent of Osaic Wealth, Inc.. Mario Hernandez is not affiliated with Osaic Wealth, Inc. or registered as a broker-dealer or investment advisor.
