Budgeting Basics For Twenty Somethings

As I have progressed into the later part of my twenties((I just turned 27 in November)), I’ve become fortunate enough to be in a position where I can say I’ve been financially independent for the majority of my adult life. That’s not to say I couldn’t support myself or didn’t have a job at some points, however I don’t particularly consider my time in college/grad school where student loans were paying for my housing to be a moment of self-sustainability. I’ve been living on my own since I was 22, and paying for all my own non-housing bills for longer than that, all while managing to build up a solid credit history.

I look at where I am now and consider myself to be decent financial shape. This reality did not happen overnight, nor will it for anyone except those who suddenly come into a large sum of money((Likely via inheritance, winning the lottery, or starting a wildly successful software startup, none of which are exactly plausible for 99.9% of people)). The foundation to being in the position I’m in now has come about as a result of fairly careful budgeting and planning. Now that I’m in a position where I’m setting myself up for success in the future, I would like to be able to share what’s been successful for me.

Follow a (modified) 50/30/20 rule

If you’re researching money management and budgeting on the internet, there’s a decent chance you’ve come across the 50/30/20 rule. While there are minor variations to wording depending on your source, the basic rule is as follows.

  • 50% of your monthly net (take-home) pay goes to fixed costs — rent, utilities, car, etc
  • 30% of your monthly net pay to flexible spending — personal entertainment, eating out, groceries, gas, etc.
  • 20% of your monthly net pay to financial goals — credit card debt, stocks, savings account, loans etc (Note: pre-tax investments like 401k are not typically included here)

I think this is a nice guideline to follow, and I have done everything I can to live by my own version of the 50/30/20 rule. With that said, there a couple notable differences in my version, which is below.

  • 50% of your monthly net income to living and employment expenses — rent, car payment, groceries, gas, utilities (Note: rent should not exceed 30% of your monthly net income in most cases)
  • 30% of your monthly net income to financial goals — credit card debt, stocks, savings, student loans
  • 20% of your monthly net income to cover all other costs — personal entertainment, eating out, extra money to put toward the other two categories

The most notable change between the typical 50/30/20 rule and my version is that I consider a pair of costs traditionally viewed as flexible — groceries and gas — to be fixed costs. Unless you’re unexpectedly changing jobs or adding a new person to your family, there is little reason these costs should drastically change month to month. Budget for this accordingly. It’s worth noting that I don’t include any bonuses I receive from my employer in the above breakdown. Bonuses almost always go towards my student loans.

Speaking of student loans…

Do not get behind on your student loans

I know this is far easier said than done, but for the love of whatever deity you choose to worship, do NOT allow your student loan payments to be late. While this is especially important for public service employees who are looking to get their Department of Education loans forgiven, it’s vital to your credit score that student loans are not paid late.

You know how you (likely) had to take out new loans ever semester as part of the results of your FAFSA? Each new round of loans you take out gets set on a separate loan within your account. So while you look at your Department of Education/Sallie Mae/Navient((Seriously, Sallie Mae, you’re not fooling anyone by changing your name to Navient. Your customer service is still awful. And how in the hell did you have customer service reviews of Navient on your website before Navient even opened? Just stop.)) account and see that you have one payment of $600 (or whatever your payment is), in reality your $600 payment is split up across multiple accounts. This means that one late payment could actually cause you to have multiple late payments on your credit report, which is damming to your credit score, especially as a twenty-something.

Don’t be afraid to work multiple jobs…within reason

My first job out of college (with my bachelor’s degree) was a call center employee at a company that took outsourced calls for a major telecommunications company whose logo may or may not look like the Death Star. I made $7.00 an hour in training and $8.00 an hour once my eight week training finished. While $14,560 a year ($7.00/hour) is still above the USA poverty guidelines, that does not mean it’s a liveable wage. In fact, if I stick to my 30% rule for rent mentioned above, a person making $7.00 an hour at a single job would have to find an apartment for $336 a month, and that’s presuming they take home 100% of their money. Not exactly a positive thought.

While minimum wage is now $7.25/hour nationwide, that’s still only an extra $520 pre-tax per year. If you’re stuck in a shitty minimum wage job that you hate, know that with enough time at the job, as well as good performance, you’ll have opportunities to move up((Or at the very least you’ll make friends who will be references for you when you leave the company)). But to survive in the meantime, if you have the time to pick up another part-time job or two, do so. Working more in your twenties will pay off in a big way as you get old.

That said, don’t overwork yourself. I made the mistake of having three part-time jobs while going to school full-time (including one job that had a 2.5 hour commute). Needless to say, the experience ended very, very poorly, courtesy of a car crash involving my truck and a semi. Learn your limits. Putting yourself in the hospital from overworking yourself certainly doesn’t help to improve your bottom line.

 

Do you have suggestions or tips that you’ve learned to managing your money as a young adult? Sound off in the comments.

 

Front page image credit: 401(k) 2012 on Flickr.

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6 thoughts on “Budgeting Basics For Twenty Somethings

  1. You know, I’ve never heard of this 50/30/20 rule even though I’ve been looking up budget/debt payment plans. I did hear of the 30% toward housing thing, but that was AFTER we purchased our house (thankfully we still came in right at that range). Good to know.

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    1. There’s a variant of the rule that’s far more well known than the 50/30/20 rule, which is the 80/20 rule. Most people hear of that in customer service/counselling/interviewing situations anymore, though it’s originally a rule of economics. Like you, I’d heard the housing one before any of the other rules, though I don’t think I met anyone who actually followed said rule until I was in high school or college.

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  2. I know I’m speaking from a position of privilege, but if you [general ‘you’, not you specifically] are a grad student who’s studying in the same city where you grew up, move back in with your parents. Yes. Move back in. You’re not getting any financial returns by throwing away a good chunk of your residual earnings into rent. Although I have the means to find an apartment due to the generous military pay, I still opted to live with my mom and double our household income while we’re at it.

    This is the only personal insight I can provide regarding budgeting. I am trying to become more financially educated, but that doesn’t really address our everyday budgeting needs.

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    1. Moving in with my grandparents was a huge help during grad school. While my initial reason for moving in with them was not grad school related, the fact that I got my master’s degree online allowed me to save money by living with them. I had applied to Ball State and U. of Maine for grad school, however considering the mental state I was in at the time grad school started, the fact that I didn’t get in to either school was a bit of a blessing in disguise.

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  3. I love this post!

    I’ve never actually sat down and budgeted… I’ve done pretty well for not budgeting, but I think it might be about time that I do so. Your 50/30/20 rule seems like a good place to start.

    I definitely agree with the working multiple jobs things. I work a full time job and a part time job. The part time job is just 2 nights a week and it’s a total of 10 scheduled hours (though it’s a restaurant and I work the closing shift, so it’s usually about 11-12 hours at the end of it). It’s been great for my savings and it’s such a small chunk of my week that I haven’t burned out from it.

    I’m sure burning out/overdoing it is definitely a possibility… your particular story sounds very frightening.

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    1. I’m very happy that I’m not in a position financially to where I need to work a part-time job with my full-time job to make ends meet. That said, I’ve strongly considered it on multiple occasions for sake of paying down my student loans. I can’t imagine the fiancee being happy with me if I do that though.

      And yes, it’s a pretty scary story. I may share it in full at a later point in time, however I’ve yet to find the right topic with which to discuss it. Maybe advice to new college students (as said wreck was caused in part by me overloading myself in order to graduate early)? I’m not sure.

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