Not called a budget, it’s a spending plan

We’ve been laying down the bricks to your wealth building. But before we make a call on your readiness to invest, you need a long-term plan. Meaning, ensuring you live your best life in the future means taking money from your today-self to give to that future-self. So do you know what you’re working with? Let’s break it down.

Q: All the disappearing acts of my paycheck. Where does it all go? And how can I make smarter decisions to plan for the future-me?

1. START with your total paycheck. This is the amount that you DON’T get to take home. Say hello to federal (and state) taxes, Social Security and Medicare. The government takes a % of your earnings to pay for things that keep the country going. The % taken from you (“withheld”, “deducted”) depends on how much you make - the more you make, the more taxes you pay. They might also deduct retirement contributions if you’re using a 401(k), and health insurance premiums if your job offers health insurance — more on these soon.

Making it real... If you have a $50,000 salary (about what 2018’s grads made, on average), your monthly paycheck might be around $4100. This is also called your GROSS pay.

2. ARRIVE at your take-home pay — the money that’s yours to use (the cash that appears in your bank account thanks to direct deposit).

Making it real... Ballpark, your take-home pay could be about $3,000. (The EXACT amount is different depending on your tax rate). This take-home is also called your NET pay.

3. SUBTRACT life needs. Recall our discussion on the 50-30-20 savings goal, where 50% of your income goes to necessities that keep you alive and well. This would be that 50% bucket.

Rent: $1,000 per month is typical for a 1br apt, but whether you’re in a big or small city and how many roommates you have can make this higher or lower.

Food: Groceries. Let’s say you spend $400/month here.

Transportation: Depending on how you get around (gas, insurance, Uber/Lyft, subway). Let’s call it $200/month.

Bills: Utilities, internet and cell service (if you’re not still on the family plan). We’ll estimate this at $100/month, assuming you split with roommates.

Basic personal care: Toiletries and keeping it all together. Let’s say about $50/month.

Making it real... The total you’re spending on NEEDS is $1,750 (58% of income)

So you’re overshooting the 50% goal set aside for NEEDS right now. That’s OK. There are times in our lives when this happens. Planning is PERSONAL. Just use this as a starting point — no embarrassment.

Making it real... Your total now is $1,250 (for the remaining Savings and Wants parts)

4. PAY YOURSELF. Aka saving & investing (for now AND for future). We discussed the easy goal is 20% of what you earn, which in our $3000 take-home pay scenario means $600. This is your monthly amount to pay your future self, either through A) your employer’s 401K retirement savings plan (when you have an employer), OR B) your own personal investment account (like a Charles Schwab or Ellevest) where you can put the money into a few ETFs (aka diversified investment portfolio), like we've discussed - so long as you’ve first built up an Emergency Fund.

Emergency Fund?
If you are or will soon be living on your own, saving 3-6 months worth of living expenses for “emergencies.” Meaning, in our scenario here where our monthly needs cost $1750, then building up to $5250-$10,500 earmarked for JUST emergencies (so you never touch it) is a good plan. 100% OK if this takes you time to build up. Major KUDOS for even doing it.

5. Life is hard. TREAT YOURSELF. After Savings are taken care of, what’s left over is your Wants money. Whether it’s for weekend travel or new yoga gear, use this money guilt-free — you earned it.

Making it real... You have $650 for fun. Technically less than the 30% (of our $3K a month take-home pay scenario) because NEEDS are costing more right now + our resolute goal to put 20% into the Future-You no matter what). But still REALLY great to have ANY money left over in these early life-building days!