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.