By: Julian Davis
In today’s world of Amazon, Apple Pay, Venmo and many other convenient technologies that make it so easy (maybe too easy) to spend money without much effort or thought, it can be hard to keep up with where your money is going. You don’t have to pull out your wallet or checkbook, or even get out of bed, to spend money. On the other hand, there are many technological products – ranging from Microsoft Excel to various free and paid budgeting apps – that make it convenient to track your spending without having to balance a checkbook or utilize the envelope system.
While I personally enjoy making a budget and tracking my adherence (or lack thereof) to the plan, I realize that not everyone considers this a favorite pastime. However, the first step in achieving your financial goals is establishing your financial goals. A key factor in setting and achieving these goals is to manage the demand for your dollars. Ultimately you want to make sure you are living below your means (spending less than you earn) and working to increase your personal bottom line a.k.a. your net worth.
It may sound very simple, but many people cannot identify where their money has gone at the end of each month. I am not suggesting that you track every penny, but you should have a general idea of the categories in which you are spending your hard-earned money. A rule of thumb that I find helpful is the 50/30/20 rule. The basic premise is that you should allocate 50% of your take-home earnings toward your “needs” or fixed costs, 30% toward your “wants” or variable costs, and 20% toward your financial goals or increasing your net worth by savings and/or debt reduction.
We all have different lifestyles so one person might consider cable television with the premium channel package or super high-speed internet as “needs”, whereas another person would classify these as “wants”. In general, expenses such as housing, transportation, and groceries would go in the “needs” bucket. Taking vacations, going shopping, or buying season tickets to the Falcons game would typically fall under “wants”. There is some gray area, for instance, while going shopping may be a “want” you could argue that clothes are a “need” (just maybe not the latest trends that everyone “likes” on Instagram). The point here is not to get bogged down in the details, but to develop a plan that fits your lifestyle, work to achieve that plan, and potentially set your sights toward more lofty goals (40/30/30 rule?) once you’re able to consistently achieve the current plan.
There are a couple of nice features of the 50/30/20 rule. Many people like to see tangible results or milestones when working toward achieving goals. Whether you are working to pay off student loans (unless you are a fortunate member of Morehouse College’s Class of 2019) or you are making maximum contributions to your 401(k), this rule of thumb gives you credit for both actions because they both positively impact your net worth. We often hear that we should avoid “lifestyle creep” as our earnings increase over the course of our careers. While this is good advice to follow, most of us like to reward ourselves for working hard. The 50/30/20 rule allows you to perhaps increase your vacation budget as long as you are still paying yourself 20% first. At the end of the day, one of the ultimate rewards of hard work is achieving your financial goals and attaining financial freedom.