Here is how much you should spend by every age, the 50 / 30 / 20 budget rule, and the best strategies to save money and invest to build wealth – enjoy! Add me on Instagram: GPStephan
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Now, when it comes to SUCCESSFULLY managing your money and growing your wealth so you’re not living paycheck to paycheck, this is probably the most widely used RULE OF THUMB out there: It’s called the 50 / 30 / 20 Rule. You take your AFTER TAX INCOME and divide that income up as follows:
50% of your income should be spent on your NEEDS – or, in other words, things you absolutely HAVE TO HAVE.
30% of your income should be spent on your WANTS – these are things that you don’t NEED to have, but they’re NICE to have:
20% should be spent on savings, investing, debt repayment, and so on.
HOWEVER – here are my thoughts:
I personally believe the best budget and way to save money is using the 50 / 10 / 40 approach:
20% SPENT ON HOUSING
Most experts are quick to suggest that housing your housing payment shouldn’t exceed 1/3rd of your income. Although I’d MUCH rather suggest that you spend – AT MOST – 25% of your income on housing, and – if at all possible – aim to spend more like 20%, or as little as you possibly can.
The conventional wisdom is that your TOTAL cost of transpiration shouldn’t exceed 15% of your income, and the total PRICE you pay for a car shouldn’t exceed 35% of your annual salary. INSTEAD, I much prefer the DAVE RAMSEY approach when it comes to how much money to spend on transportation: He recommends that your transportation cost NOT EXCEED 10% of your annual income, you should ONLY buy USED cars until you have a net worth over $1 million dollars, and I would go so far as to say the value of the car you buy should be LESS than 25% of your annual income.
10% FOOD or $600/MO – whatever is less
That’s why I believe a 10% food budget is OKAY when that adds up to less than $500 per month…but, once you start making more money, your food budget doesn’t need to go up alongside your income.
5% Health Insurance
Health insurance can easily be 5% of your income…or, about $200-$500 per month for a single person depending on your age, location, and health insurance provider. It’s hard to put a “maximum amount” to spend here because you shouldn’t be cheap with your health…but, we’ll just round this off to 5% to be on the safe side.
3% Utilities – $500 or LESS
Generally, for most, you’re looking at around $50 – $250 per month – again, depending on your location and how hot or cold you like to keep your house. Or if you do laundry during off peak electrical hours.
10% FUN / ENTERTAINMENT OR WHATEVER
I think it’s ABSOLUTELY reasonable that 10% of your income can be spent, without thinking about it, on whatever fun purchases you want to make, as long as this is budgeted for. It IS important that you have some money left over just to splurge, and spending 10% is just enough to “get it out of your system” without getting carried away.
The first thing I would do is save up a 6 month safety fund, in cash, held within a high interest savings account.
But once you’ve done that, your remaining savings should go towards maxing your your 401K up to your employer contribution limit.
After that, the next $6000 you invest should go towards maxing out your Roth IRA.
From there, any money you have left over should go towards a TAXABLE INVESTMENT account or some other type of investment that will grow over time.
At a 42% savings rate…you’d EASILY be able to retire in just about 20 years from the 4% rule like I mentioned earlier…meaning, if you start doing this NOW at 20 years old…by the time you’re 40…you will be nearly ready to retire, if you want to.
For business or one-on-one real estate investing/real estate agent consulting inquiries, you can reach me at GrahamStephanBusiness@gmail.com
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