I follow a lot of financial influencers on social media. Business owners, high net worth individuals, personal finance YouTubers, and people who sell courses (gross).
As a listener/watcher/follower I find all of the advice helpful but hard to relate to my current situation. Most of these influential figures talk about saving 75% of your income or using the FIRE method to retire by 30. While those things are possible, they're not exactly easy to digest as someone who's just starting their career and planning their 1st budget.
So to help counteract this I've started a new series: Financial Flexibility. Rather than focusing on freedom and "passive income cash flow", this series will focus on documenting and creating wealth through a regular career. I don't make 7 figures, I don't own multiple businesses or rental real estate. Just a regular kid on the internet with a sales job.
It's a simple breakdown of your gross income. 50% toward necessities. 30% toward discretionary spending. 20% toward savings.
For some reason $45,000/year is this magical number that college grads want to make in their 1st year out of school so let's use it for this example.
50% toward necessities = $22,500/year | $1,875/month.
30% toward discretionary spend = $13,500/year | $1,125/month.
20% toward savings = $9,000/year | $750/month.
That's it. If you can focus on this and achieve it during your 1st year of your career you'll begin to understand your financial habits.
WHY IS 50/30/20 SO SIMPLE BUT SO HARD
Here is a small breakdown of the average costs of things per month in Michigan:
Rent: $1,000 | Car: $300 | Insurance: $100 | Gas: $200 | Phone: $100 | Groceries: $300 | Student Loans: $300 |
*All necessity costs shown are the averages from studies/research conducted in the State of Michigan
If you're anywhere near this average you're going to be over-budget. The 1st thing to go when you're over-budget is your savings goal, even though it's the most important part. Plus, these calculations don't take into account taxes. See, it's kinda scary.
WHY 50/30/20 IS CRUCIAL TO YOUR FUTURE SUCCESS
If you can live by this rule for the 1st year of your career you'll set yourself apart from nearly every single one of your friends. It's not a competition but rather a matter of comfort.
Do you want to have an emergency fund? Do you want to have flexibility in your daily spending? Do you want to take a 3-day weekend trip to Chicago to visit some friends? 50/30/20 in your 1st year is the only way.
The 20% you put toward savings accomplishes all of these things. Accidents happen, cars get flat tires, you lose your wallet, etc.. Having a baby emergency fund creates peace of mind and having that is priceless as a millennial.
YOUR FINANCIAL HABITS BEGIN EARLY
Like I mentioned above, you learn a lot about your spending habits when you're focusing on 50/30/20. I don't care what you spend your money on, I care about creating habits that yield a massive ROI for the years to come.
As a millennial who started their career 18 months ago I'm incredibly happy I committed to 50/30/20 early on. Some months are incredibly hard but that emergency fund looks so sexy in my account.
Next episode of Financial Flexibility will focus on how to cut your 50% of necessities and where to invest your 20% of savings. Follow along on this LinkedIn page, the Creative Variable Instagram, and my YouTube Channel!