Here's a simple strategy of managing personal finances: 50/30/20 rule. 50% for necessities such as housing, utilities, groceries. 30% for wants such as entertainment, eating out and vacation. 20% for savings and investing. One starts with after tax income and divide up take home pay by these percentages.
The numbers are simple. The hard part is having the discipline to achieve the numbers and making good choices when the numbers are not initially achievable.
Here my personal priority order:
- Necessities - housing, utilities, groceries, necessary debt payments (student loan, car)
- Savings/Investments - savings accounts, equities, bonds/CDs
- Wants - entertainment, eating out, vacations, large purchases
Specifically, I put savings ahead of wants if there are not sufficient funds.
Below are the estimated take home after tax pay, but before state income taxes since that can vary significantly.
| 50/20/30 Split | |||
|---|---|---|---|
| Yearly Income/Monthly After Tax | Necessities | Savings/Investments | Wants |
| $40,000/$2,848 after tax per month | $1,424 | $570 | $854 |
| $60,000/$4,187 after tax per month | $2,094 | $837 | $1,256 |
| $100,000/$6,561 after tax per month | $3,281 | $1,312 | $1,968 |
It is rare that people are able to meet the 50/20/30 split rule. Here are some challenges that people have. First, necessities often exceed 50% and they neglect to make corrects to reduce spending or increase income. Another challenge is many people make is prioritizing "wants" over "savings/investments."
Being a CFO means making the corrections needed to get back on track to being successful.
For more on Strategies and Plans , check back every Monday for a new segment.
This is not financial advice. Please consult a professional advisor.
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