How to Divvy Up Your Paycheck for Financial Success: The 50/30/20 Rule

How to Divvy Up Your Paycheck for Financial Success
PHOTO: @lucywilliams02

You know those weeks when it feels like you’re just spending money every single day? We hear you — it’s kind of like that happy hour you so badly want to attend after work. You got out early. You had a tough day and you just want to see your girls.

But giving up that happy hour drink and appetizer ($15 per night out x 10 workdays a month = $150) can make a big difference at the end of the month.

Don’t get me wrong, payday is amazing.  But what you do with the money you make is really what’s key.

We’re all managing multiple financial goals throughout our lives, so how can we save and invest, and still enjoy the life we’re living now?

Financial experts advise that you follow the “50/20/30”, and Sallie Krawcheck, CEO, and co-founder of Ellevest, a robo-advisory investment firm tailored specifically to women’s needs, agrees.

To help us manage how much of our paycheck we can spend on shopping and travel, how much we should really be paying for rent, and everything in between, we sat down with Krawcheck to learn more about how to budget effectively using the “50/20/30” rule.

Quit making excuses—Here’s the smart way to break down your monthly income. 

The 50/30/20 Philosophy—How It Works:

You’re going to make it a habit to budget a little each month, but how much exactly? According to Krawcheck, you should take out your monthly bank statements and divide your after-tax income among needs, wants, savings and debt repayment, using the 50/30/20 budget as a guide.

  • 50% of your income should go to living expenses and essentials. This includes your rent, utilities, and things like groceries and – transportation for work.
  • 30% of your income should be used for flexible spending. This is everything you buy that you want but don’t necessarily need (like money spent on movies and travel).
  • 20% of your income should go to financial goals, meaning your savings, investments, and debt-reduction payments (if you have debt, such as credit card payments).

Don’t think you have enough money to invest 2o percent? That’s OK. Start with 1%, then work your way to 5% and then 10 %. The goal is to eventually be setting aside 20% of every paycheck to Future You.

Follow this rule of thumb, Krawcheck says, and you’ll be set for financial success over the course of your life.

Takeaway tip: Start saving and investing. Ellevest doesn’t require any minimum to open an account, so you can start with as little or as much as you like.

PHOTO: The Balance

That 20 Percent…

Investing is one of the most important things you can do for yourself. It can build your wealth . . . not by a little, but by enough to make a real difference in your life,” says Krawcheck. We know you’re working hard — building your career, getting that raise. Basically, killing it in almost every area of your life. And we love that. But when you invest that money you’ve been working oh-so-hard to earn, you’re saying yes to the prospect of building to a whole lot more.

Need some numbers to make it believable? Here they are:  

Let’s say you’re 31, making $85,000 a year, have no existing investable assets, and you decide, “Hey, it’s about time I put me first,” and choose the start investing. You sign up for Ellevest and contribute 20% of your monthly salary, or roughly $1,400, to the account every month. According to Ellevest‘s estimates*, you could have around $577,000 in your portfolio at the end of 20 years or $1.1 million after 30 years.

And no, those aren’t random numbers that they pulled out of thin air. They’re fact. If you make the recommended contributions, you’ll likely hit those targets, or better, in 70% of forecasted market scenarios. “This is about investing over the long term to grow your net worth,” says Krawcheck.  The right time to take your money out of the bank and invest is almost always “now,” so that the power of compounding can begin to work its “magic.”

As a woman, the gender pay gap can work overtime to ensure that you take home less money than your male peers. It’s not fair, but (sigh) those are the facts.

Takeaway tip:  The right time to take your money out of the bank and invest is almost always “now,” so that the power of compounding can begin to work its “magic.”

Invest. Invest. Invest.

OK, so I know I’m going to sound like a broken record here, but it needs to be said. Over and over again. Invest. Invest. Invest. You probably often hear about the importance of investing, but maybe you may not know exactly know what it means. Or where to start.  When you invest, you give yourself the opportunity to earn more money than what you’d likely get from keeping your money in a barely-earning-interest savings account. That could mean a better retirement. A nicer house. A bigger F-Off fund.

Financial feminism means we will start talking about money. We’ll ask for more money, we’ll save more money, we’ll invest more money, and we’ll give ourselves the opportunities we deserve.

Takeaway tip: Money is power. It’s way past time that we got ours.  Invest to own your future.

Put Yourself on Autopilot

Automation is the easiest way to save and invest. When you choose how much to put toward investing every month — whether it’s a dollar or a percentage of your pay — you should automate it.  Why? Because if you set it up that way, with auto direct deposits into an investment account, you won’t “forget” to invest and miss out on closing your personal gender investing gap. You can automate investing with an online, automated portfolio management service. like Ellevest, Betterement, or Wealthfront (more on how to do that here).

These automated portfolio management service — or robo-advisors — are smart and super easy to use, so you’ll save tons of time on your finances. Plus, they’re free or low cost, available 24/7, and can easily be accessed on your phone or laptop.

Another feature that increases the likelihood that you’ll achieve your goals is auto deposit — the ability to have a portion of your paycheck deposited directly into your Ellevest account. After all, it’s harder to spend it if the money doesn’t even make a pit stop in your checking account.