Taking Steps to Secure Your Financial Future
Millennials want to save for their future, but many are confused about the best way to do so. Do they use an app? Should they have an ‘emergency fund’? How much should they spend on housing? The questions are endless, and the answers, depending on who you ask, can be complex. Finance guru, Michael Stummer, believes that, for young individuals, financial success doesn’t come from cutting out luxuries or saving every penny they earn – it comes from knowing what you can afford to spend and following a budget. More specifically, the 50 / 20/ 30 Budget.
When speaking of the importance of planning, he instructs his clients and followers to not only use a budget to organize their spending, but also to zero that budget out each month. Implementing a comprehensive plan allows individuals to prioritize their spending and maintain financial security.
What does it mean to zero out? We will get to that in a minute. First, let’s take a closer look at the 50 / 20 / 30 rule.
What is the 50 / 20 / 30 Budget?
The 50 / 20 / 30 budget is a financial affordability tool that has gained popularity amongst young adults because it is exceptionally easy to follow and customize to meet individual circumstances. Why is it so successful? It makes it easy to create a true financial snapshot by breaking incoming and outgoing finances into three distinct categories which include:
Half, or 50%, of your take home pay should go towards your basic needs or living expenses. This includes all the regular payments that are essential to life, like rent / mortgage, electricity, food, insurance, transportation, etc. Everything that is required to keep a roof over your head and food in your stomach should be consider a ‘need’.
Approximately 20% of your take home pay should be allocated towards ‘wants’. Concert tickets, your daily coffee, gifts for yourself or others, this category is just as it sounds – Things that bring you joy but aren’t essential to keeping you healthy or safe.
The remaining 30% of your take home income should go towards savings, or debt repayment if you are trying to get out of debt. If debt is an issue, you may want to start by saving an ‘emergency fund’ of $1000 and then focusing future budgets on paying down and minimizing your debt.
What does a 50 / 20 / 30 Budget Look Like?
Let’s pretend for a minute that you are a 24-year-old new grad and you’ve just taken an entry level job in a local office building, your monthly net (pay after taxes) pay is $3500. Following the 50 / 20 / 30 rule, your budget should look like this:
- Needs - $1750
- Wants - $700
- Savings - $1050
Now, let’s assume that your monthly housing and food costs total $1900 or that your minimum monthly debt repayments total $1200 – do you short pay something? Of course not. The purpose of the 50 / 20 / 30 budget is to provide a clear picture of what you can afford in the long-term and this is where the benefit of ‘budgeting to zero’ is recognized.
What is Budgeting to Zero?
Budgeting to zero is simply weighing your pending monthly expenses against your most recent paycheque and giving every dollar a ‘home’ until you have no money left unaccounted for. Every dollar that goes into your bank account needs to have a place to go – whether that is to needs, wants or savings. The money allotted to each category should come as close to the 50 / 20 / 30 rule as possible. If you find that you are regularly going over budget, you should consider finding a way to either lower your expenses or increase your income.
Creating Your Own 50 / 20 / 30 Budget in Four Easy Steps
Now that you understand the concept behind a 50 / 20 / 30 budget, creating your own is simple.
Step One (Calculate your Net Pay): Your net pay is the amount of pay you bring home on a weekly, biweekly or monthly basis after all tax and source deductions have been taken off. Most of the time, this information can be found simply by looking at your most recent paystub.
Step Two (Calculate your basic needs and try to fit them into 50% of your income): For most people, it should be obvious what will fit into the ‘needs’ category. These are things like rent or mortgage payments, heat and water bills, groceries – everything that is required to keep you warm, housed and fed.
If you find that your essential costs add up to less than 50% of your income, go ahead and tack the surplus on to a debt payment or use it to pad your savings.
Step Three (Calculate your WANTS and try to budget them into 20% of your income): Your wants are basically the things you want, but don’t necessarily need. This includes things like dining out, cable TV, and trips to the salon. Some people will tell you that your monthly cell phone bill should also be considered a ‘want’ but if you don’t have a landline and your cell phone is your only means of communication, go ahead and consider it an essential item.
Step Four (Calculate your SAVINGS based on 30% and allocate it somewhere): The most powerful impact that the 50 / 20 / 30 rule has is that it almost always guarantees that you will be saving money at the end of the month.
Treat 30% of your income as a bill payment and allocate it to some sort of savings vehicle each month. Of course, debt payments should always come first. But, if you aren’t in debt consider high yield investments, or high interest rate savings accounts to help your money grow over time.