This post is sponsored by Lexington Law.
The money comes in, the money goes out… is this how it’s going to be from now until… forever?
What if I told you it doesn’t have to be? No, really. There can be more to your life and your finances than a revolving door of money. It might be #relatable to joke about eating ramen until payday but in reality there’s nothing truly fun about it.
When you paycheck hits your bank account, you’re either setting yourself up for success or not. Below, we’re going to talk about a popular budgeting guideline, the caveat I think is most important, how I budget my own money, and where you should go from here.
The 50/30/20 Guideline
Have you heard of the 50/30/20 guideline? Essentially it outlines that you should aim to spend 50% of your income on needs, 30% on wants, and put 20% into savings.
So if you’re bring in $5,000 every month, $2,500 would go towards needs, $1,500 towards wants, and the remaining $1,000 towards savings. What do your current expenses look like in comparison to this?
You can figure it out simply by multiplying your take home pay by .5, .3, and .2 to get the numbers you would use for yourself.
I personally thing this is a pretty good place to start with figuring out how you should be allocating your money. But with one caveat; I think your savings should be as high as possible.
How To Budget Your Own Paycheck
So let’s say your paycheck has just hit your bank account. What do you do with it?
Before you take it as a sign to #treatyoself, take a minute to think about your priorities.
Is anything in your life going to change if you go spend $20, $50 or $100 right this minute? Probably not.
When you get paid, how you’re budgeting your paycheck is essential splitting it between your past self, your current self, and your future self.
Your past self is all of your debt that you need to pay off. Your current self is your expenses and wants you need to cover now. And your future self is your savings.
1. Let’s talk about your current self.
The first thing you should do is make sure you can cover all of your bills. It’s also ideal to avoid accruing any more debt (especially if you already have some).
Use our budget worksheet (found in the resource library) to list out all of your current expenses, including debt payments. What percentage of your paycheck does this take up?
Remember, according to the 50/30/20 rule, it should be less than 50%.
Are your expenses less than that? Great! Whatever percentage is leftover can be put towards your past self or your future self.
If it’s not, looking at your expenses, what could be reduced? Do you really *need* everything you’re currently paying for? How can you reduce any of these things expenses?
For example, I’ve cancelled several subscriptions in the past because they were no longer serving me and I’d rather put that money towards something else every month.
My husband and I also moved in with a roommate to save us $900/month on rent for a year while we aggressively paid off our student loans. Would I have preferred to live alone? Absolutely. Was it one of the most frustrating things I’ve ever gone through? Yep. But now I’m debt-free and I’m incredibly thankful that I made that choice years ago.
Go through and negotiate what expenses you can. Even saving $50 a month adds up to $600 a year that you could be putting towards something else.
You can be flexible with your spending (I talk about budgeting without a budget here), while still meeting your financial goals.
2. Let’s discuss your past self.
Your past self is responsible for the debt you have now.
Yep, every time you spend money you don’t have, you’re only costing your future self (which then eventually becomes your current self and ends up being something you have to deal with regardless).
If you have debt, it’s important to prioritize it, for both your current and future self’s sake. No matter how you ended up in this situation, I believe you have the power to change it. Ultimately that debt is going to have to be paid off. And because you signed your name to it, you’re going to need to be the one to do it.
You can make sure you are making these payments by scheduling automated payments. Just like you would set up automatic payments for your savings accounts, do it for your credit cards, student loans, mortgage, private loans, etc.
Most lenders that I’m aware of have an online portal where you can make your payments online. In this same place, you should be able to schedule automatic upcoming payments.
Reducing your debt is important to help your future self out, but also to build your credit. Missing payments can ding your credit score significantly, making life even harder on future you.
Paying your debt down will also help you increase your utilization ratio. This number is the amount of credit you are using over the amount of credit you have available. It accounts for 30% of your credit score so it’s a fairly easy way to help yourself. It’s recommended to keep this ratio below 30%. So for example, if you have $10,000 in available credit and you’re carrying balances of $2,500, your utilization ratio is 25%.
Getting your ratio below 30% is a good first financial goal when paying down you debt. There is also a difference in line item (on each individual line of credit) and aggregate (all of your lines of credit together) utilization. So if you have a card with a particularly high balance, you might focus on paying that off first. However, make sure to check you interest rates! Paying off cards with high interests rates first can also be a smart move because it will cost you less out of pocket.
Your credit is so important (and your debt plays a major role in your credit score!). A higher credit score is a gateway to better interest rates, more opportunities for where you live (and even work), financial freedom in the future, and the price you pay for things like a house and a car.
Plus, the less debt you’re paying off, the more money you’ll be able to save and invest for future you.
If you haven’t taken a look at your credit report recently, I would recommend that you do so as soon as possible. Lexington Law has a guide for how to check it for free here. Looking at your report, you’ll be able to see all of your lines of credit. If anything looks suspicious or unfamiliar, there are things you can do about unfair negative items on your credit report. If there are any issues you have questions about, I recommend contacting the credit repair consultants at Lexington Law for a free consultation. Your credit is something you want to improve and take care of as soon as possible!
3. Helping out future you.
This is where your savings comes in. In my opinion, this is the most important category.
Saving (and saving via investing) are one of the most important things you’ll ever do for yourself.
Building a savings habit is what is ultimately going to improve your life for your future self. Imagine a day you don’t have to make debt payments anymore.
Imagine a day where you can do exactly what you want to do *without* checking your bank account to make sure the money is there. It is possible, but it’s important to make that a priority right now.
When you look at your current budget, ask yourself these questions:
- How many of these “needs” can be reduced?
- Which of my “wants” can I cut back on?
- What areas of my budget can I save more in?
The truth is that these things are going to be different for everyone. Some people might be okay with spending $50/week on groceries. For others, $200/week is what feeds their family. It’s all subjective and relative and that’s okay. What’s important here is that you are making smart sacrifices for your future self.
I’ll share a little bit more about my financial evolution in the next section, but I do want to say that sometimes short-term sacrifices can be worth it to achieve a financial goal. People are out there doing it all the time, and you can do it too!
To make saving easy, I recommend automating your “savings payments.” As soon as we get paid, we transfer money immediately to savings. There’s enough left for our needs and wants, of course, but saving is our top priority.
We also have automatic transfers into our investment accounts so that all happens automatically. We only have revolving savings at the bank where our checking account is so that it is not easy to dip into that money. If it’s easy to get to, it’s easy to spend — and that’s something you want to avoid.
How I Budget My Paycheck
To set the stage for you, my husband and I are a dual-income, three person household. We have no debt (we paid off our student loans several years ago), and currently rent an apartment (and are saving aggressively for a down payment). I work at home and take care of my seven month old during the day hours so we do not currently pay for childcare. We also purchased a car earlier this year (after being carless for 6.5 years) in full so we have no car payment either.
Looking over our past year of budgets and expenses this is how we allocated our money:
- 60% to savings
- 25% to needs
- 15% to wants
We’re almost 30 and it’s taken us a long time to get here, along with trial, error, and flexibility on how exactly we spend our money. We’ve also been able to increase our income significantly over the past few years using the strategies I talk about here.
These numbers probably won’t always be the way there are. I’m sure our “needs” will increase in time as our son gets older or if we have more children. But our financial landscape will change in other ways. When we buy a house, for example, we won’t be making rent payments and the money we’re currently putting in savings for a house can go towards our mortgage. Our lives evolve and our money evolves with it — and that’s okay.
Budgeting Your Paycheck
Like we discussed above, the 50/30/20 guideline is a great place to start with your spending and savings. Looking at your current spending and financial goals, where can you cut back? How can you pay off your debt faster? And how can you increase your savings.
It’s a fairly straightforward method but money can be very emotional, it can be draining, and it can be exhausting. However, it is 100% worth it to make the effort to improve your financial life, reduce your debt, increase your investments, and improve your credit.
If you have questions about anything here, let me know in the comments! If you have questions about your credit score or report, reach out to the credit repair consultants at Lexington Law here.