When that first huge chunk of money hits your bank account, you may just get stars in your eyes. The accountant in you is screaming, be smart, but this ability to finally afford those expensive meals out, your brand-new apartment, and new corporate duds is oh so appealing and finally within reach.
But think back to the, no doubt, countless conversations you have had with your company about spending smart. They rely on you to translate the numbers and tell a story so that they can make sound business decisions – when to hire, when to take on new clients, when to invest in capital. It’s crazy how money can be spent unwisely if companies didn’t have people like you on their side, right? Your personal finances are no different. To avoid the same fate that would plague a company without an accountant, take this quick crash course in how to divide up your earnings like a boss—ahem, CFO?
For starters, let’s discuss some general guidelines, which make up what we like to call the 50/20/30 Rule:
50% Should Go Toward … Essentials
At LearnVest Planning, we define essentials as the stuff you need to live, so cocktails with coworkers don’t count. This category includes housing (e.g. rent on your swank digs or mortgage payments), transportation (gas, public transportation, car insurance), utilities (electric, gas, water) and groceries (anything that comes from the grocery store).
So you should aim to spend no more than half of your take-home paycheck—that’s after taxes—on these things. In other words, if your rent is equal to 45% of your take-home pay, then you should probably downgrade.
20% Should Go Toward … Financial Priorities
Is your dream to someday quit accounting and open a farm-to-table restaurant? Or maybe you’re hoping to take an amazing trip around the world . . . when you finally retire. These all fall into the financial priorities category—along with those crippling student loan payments. Bottom line: At least 20% of your take-home pay should be set aside to reach your major financial goals.
30% Should Go Toward … Lifestyle Choices
Now for what you’ve really been waiting for … After you’ve paid for the essentials, and set aside money for financial priorities, you should aim to use no more than 30% on whatever else your heart desires. This includes—but is not limited to—happy hours, work clothing, travel, takeout, HBO and the gym membership that you’ll probably never have time to use.
What’s That? This Isn’t At All Realistic?
Yeah, we hear you. Especially those of you who are laboring under large student loan payments that make up 20% of your paycheck alone. Here’s what you need to keep in mind: The 50/20/30 Rule is a broad guideline, so you might have to tweak it to line up with your individual situation.
Notice how we said at least
20% on financial priorities, and no more than
50% on essentials. So if you have big loan payments, you may have to get a roommate or live without cable for a bit to make it work. And note that even if your debt repayment is bordering on 20%, you also need to be saving for emergencies and retirement!
Why It May Be Time to Call in a Pro …
Since you’re an accountant, you feel like you can and should tackle this on your own without consulting a financial planner. Of course you wouldn’t because so many money advisors work on a percentage model. Translation: “You give me assets, and I’ll charge you 1% of your assets to give you financial advice.” But there is something to be said for the accountability and support only another person can provide.
To get you on the right track—i.e. paying down that student loan debt in a manageable way, while also saving for a condo or a house—you need advice on budgeting and building out a 5-year plan and the accountability to stick with it. Lucky for you, LearnVest Planning offers fee-based financial services for a fraction of the average monthly gym membership* that you’re not using.
The opinions expressed in this article are that of LearnVest Planning Services, a registered investment adviser. The advice provided may not be suitable for your individual situation and you should discuss your situation with a financial professional. LVPS is not responsible for any third party advertisements or opinions on this site.