You have worked so hard for this moment, you have finally received your first professional pay check! Now time to splurge at the mall!
Sorry to break the excitement but No! Now is the time to be responsible and budget very wisely. Yes this may seem like a lot more money than you are used to making in college/university, but now you have many responsibilities to take care of especially those loans.
One rule I like to stick to for budgeting is called the 50/30/20 rule.
So what exactly is the 50/30/20 rule?
The 50/30/20 rule essentially means that:
- 50% of your income will go to your absolute necessities in life such as: housing, groceries, utilities and transportation (gas, train tickets etc.) Also keep in mind that the general rule is that no more than 30% of your income should go to rent or mortgage.
- 30% of your monthly income will go to your voluntary obligations (these are things that are not a complete must) which includes: cable TV, dining out, clothing, leisure & travel.
- 20% of your monthly income will go to PAYING YOURSELF FIRST which in other words means SAVINGS. This 20% on a monthly basis can be used for both savings and investments for retirement. It can also be helpful for emergency funds as you know emergencies tend to come up often in life. This amount can also be used to pay debt.
Now I understand this rule may not work for everyone especially if you have student loans to pay, car payments you are making and perhaps your rent may be expensive. My advice is to make sure those important obligations are paid first before utilizing the 50/30/20 rule. let me explain with an example.
Stacey is a new graduate pharmacist from New York who just received her first monthly pay check of $5000. She has the following obligations that MUST be paid monthly:
- $200 monthly for Car payments
- $150 monthly for Car insurance
- $1200 monthly for Student loans
- $1700 monthly for Rent ( above the 30% rule for rent/mortgage)
- $150 to Utilities (water and electricity)
If she were to follow the rule only $1000 could be used towards savings and paying debt which as shown above is not enough considering her $1200 monthly student loan payment. Also, she is paying more rent than is expected for someone making what she makes on a monthly basis. So we would have to modify the rule a bit to fit her situation. These monthly obligations cost in total $3400, if we subtract this from her monthly income we are left with $1600.
So with this remaining $1600 we can use the 50/30/20 rule after fulfilling her monthly obligations, which means that:
- $800 will be dedicated to anything else that is obligatory such as groceries, housing, gas and anything else transportation related
- $480 will be dedicated to voluntary obligations such as cable/internet for her apartment, clothing or dining out with friends
- $320 will be dedicated monthly to her savings of which she could put towards her retirement, future investments or credit card payments
$320 monthly for savings may seem like too little to you and that is fine! You can always adjust the percentages to fit your needs. Perhaps the 50% towards housing and groceries is too much for you. You can then reduce it to 35% and add the extra 15% to your savings.
If Stacey did this, her savings would end up being $560 on a monthly basis which on a annual basis enables her to save $6,720 a year.
So my final advice to budgeting is to list what are important obligations you must pay especially debt wise (exclude groceries, gas, renters insurance etc.) then subtract that from your monthly income and utilize the 50/30/20 rule or modify it to a 35/30/35 rule to increase your savings.
Kgrant