There are more ways to spend your money today than ever before. New gadgets, new restaurants to try, unlimited investment opportunities. Where do you start and how do you still have enough money to save enough for a rainy day and retirement?
While standard advice such as “Pay yourself first” and “Max out your 401k” are solid advice; those are just pieces of the pie that aren’t usually defined. To create a financial plan that sets you up for success, you need to base your spending and saving around percentages of your income, not set amounts. This will allow you to accommodate for fluctuating incomes and enable you to scale as your income grows over time.
According to recent surveys, your income will grow. Income from ages 20-24 averages just over $27,000 a year. This number increases substantially over the years and maxes out in the age range of 45-54 at just over $50,000 a year.
The simplest method to follow is the 50/20/30 rule. Half of your income, 50%, should go to essentials. This includes housing, food, transportation, and utilities. If this is costing more than 50% of your income, look into either finding a way to make more money or moving to a cheaper home.
A fifth of your income, 20%, should go towards yourself. This money can either be used to pay off existing debt or invest towards future financial security. The final 30% of your income is all for you. Spend it how you like. Movies, date nights, new clothes, you name it. This is your money to spend.
This is a great model that will set you up for a worry-free retirement. If you’re ambitious and want to retire 15-20 years before everybody else, step up your savings game. By cutting down and living expenses and discretionary spending, extra money invested can drastically shorten the time towards retirement.
According to Mr. Money Moustache, a personal finance blog, bumping your savings up to 50% of your income can reduce the amount of time working from 36.7 years down to 16.6 years. Retiring 20 years ahead of schedule can certainly be a strong motivator to set aside extra money every paycheck.
Interested in finding out more about how millennials can maximize their spending and saving? Check out the infographic below. It not only breaks down the methods above, but also lists some of the most common jobs held by millennials and what the average pay for those areas is.