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Financial Toolkit for Millennials: Getting Started – The 50/20/30 Rule

As I’ve said before, money is a tool. If wielded properly it can give you the confidence and freedom to live the life you want. Managed improperly, it can give you ecstasy one day and anxiety the next.

The hardest thing to do when getting started is working out what you can afford to put aside for the long term. You still need money for today and it is important to enjoy it in the present. But you’ll also need money for tomorrow and it can be difficult to balance the two.

The answer is to set a budget.

By budget, I don’t mean an in-depth analysis of every penny you spend and it definitely isn’t about feeling guilty if you go out for dinner or buy yourself a new TV.

Budgeting is simply about knowing what money is coming in and how you allocate it.

You’ll need to find what works for you but the following “rule of thumb” is a simple, tried and tested model that can start you on your way to financial confidence.

The 50-20-30 rule

The 50-20-30 rule is a simple model to help you build a budget that spreads your money across your lifetime. Start with your monthly income after tax i.e. your take home pay. Now divide it into three pots;

  • 50% goes towards living expenses and essentials. This includes your rent/mortgage, utilities, groceries etc.
  • 20% is put towards your financial goals. This can be building up a rainy day cash reserve, paying down debt or investing for the future.
  • 30% can then be used for spending on whatever you want (I’ll let you think of your own examples here)

It’s not a hard and fast rule, but as a starting point it keeps your finances simple. You can pay your bills, start saving for the future or pay down existing debt, and still have the freedom to enjoy your money in the present.

Avoiding temptation

The problem is we are all human and all, in one way or another, prone to instant gratification. It becomes very easy to be tempted to just spend the 20% especially if it is just sitting in your account. But what can you do?

Think of all the direct debits coming from your account each month. If you’re anything like me it’ll be something along the lines of Netflix, Gym, Phone, etc. Do you notice them going out? Probably not.

Companies know this which is why they try to set up direct debits for everything. They become an external force that takes your money. The good thing is, you can be your own external force.

Once you know what you can afford to save or invest each month, try to automate it by setting up a direct debit. By doing so, your investment becomes habit and you avoid temptation.

Managing money is as much about managing your behaviour as it is anything else. Putting in place a simple strategy like the 50-20-30 rule can be your first step towards financial confidence both now and in the future.

Savings, investments & FOMO

In the next blog, I want to start looking at the difference between savings and investments and how fear of missing out could be driving your financial decisions more than you realise.

 

Disclaimer: The information provided through the Equilibrium website is based on our opinion and is for general information purposes only. It is not to be, and should not, construed as financial advice.