I don’t like to spend money. I abhor the sight of a fresh, crisp, and green slip of paper leaving my fingers and into someone’s dirty greedy hands. The less I have to handle money the better. I’m a saver. I’ve never owned a credit card and I pay for everything upfront, except for my student loans- those gosh-darn-awful student loans. Nevertheless, at the end of the day, there are bills to pay and necessary expenses. And I need some way to keep track of my expenses.
There are plenty of ways you can approach your personal finances. Some people find time to create elaborate spreadsheets to budget everything. As much as I enjoy a well-crafted spreadsheet, I like to keep things simple. My wife Erica and I follow what’s called the 50-30-20 rule. The 50-30-20 rule basically is the following:
- 50% of your income goes directly to living expenses (rent, bills, food, etc.) aka things you need to survive
- 30% of your income is your own extra spending money (we use this category to pay off student loans)
- 20% of your income goes directly into long term savings
There are of course moderations to this rule and you can always tailor it to your living situation.
How to follow the 50-30-20 rule
First, you are going to need to open up 3 different bank accounts – 2 checking and 1 savings. We use PNC Bank which makes setting up new accounts a cinch and they have a great online banking tool. Preferably you should open up the accounts with the same bank, it makes transferring funds between accounts a lot easier.
Next, check with your employer to see if you have direct deposit for your pay check. If so, they should have the option to designate how much you want deposited into certain bank accounts. Therefore, designate 50% of your paycheck to the “living expenses” account, 30% to the “spending” account, and the rest into the savings account.
If your employer doesn’t offer direct deposit or doesn’t deposit across multiple accounts, you can easily work around this. First, have all of your pay checks deposit into your “living expenses” account. Then, using your banks online tool (and most major banks have one by now, hopefully), set up automatic payments to transfer 30% of your income to the “spending” account and 20% to the “Savings” account. It helps if your pay is the same amount every pay period, that way you can just calculate the transfers ahead of time. If your pay varies (like a waitress or part time employment) you’ll just have to do a simple calculation each week.
What to do with your 30%
Your spending account is all yours and you can do what ever you want with it. But it still pays to be smart (terrible pun intended). Just because you now have all the monies doesn’t mean you should be throwing all the monies away. Erica and I divide up this 30% even further.
For our own personal allowances, we each get 2.5%. Erica has this amount automatically transferred into her own account. I just visit the ATM after each paycheck. We also allocate 5% to give to charity. I set up a separate account and call it my “charity” account. We treat this money like it’s not ours and give all of it away to many causes. This approach actually makes it really easy to give. Finally, we use the remaining 20% to pay off our student loans.
Does this method work?
Surprisingly, this simple method works really well for us. I work full-time for a modest pay, my wife is in grad school, and we still don’t use credit cards, have taken two trips to Ireland in the past 16 months, saved up about 1/2 of what we need for a house down-payment, give to charity, and are on track to pay off our student loans in 15 years. We live comfortably but not extravagantly and we don’t feel bad treating ourselves every once and a while to a nice dinner or new gadget.
What do you think? Is this a simple and effective method? How do you manage your finances?