The Graduate’s Guide to Finance
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:
- 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.
- 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.
- 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 $659 each month for whatever you want may seem like a lot, but when you actually break down how much you are currently spending, it will shock you how fast it goes.
Another thing that will surprise you is how much your “essential” life costs. You’ll want to break down your recurring fixed expenses and your weekly incidental purchases, such as visits to the grocery store. Then you will have a better idea of how much you will need to budget. Some people eat less than others, therefore your grocery bill is less; however, you may have expensive monthly prescriptions you have to fill.
Another allocation you may like to make would be that for charity. If you have leftover “want “ money and have already invested some in retirement, etc., a nice place for the excess could be charities.
The worst thing you can do is NOT be prepared, NOT know how much you’re spending because it either scares or overwhelms you to think about it and you would rather be naïve. This is the painless way to become more aware. You are not the only one going through this transition period and that’s what it is: a transition. This is not permanent.
Through your life, you will get higher-paying jobs as you become more experienced and become more of an asset to your employer, and with that you can amp up your lifestyle. For now, be smart and learn to be savvy.
Related: 9 Smart Spending and Saving Tips
Excerpted from Barneys, Bergdorfs & Bill$: A Girlfriends’ Guide to Finance