Budget Guidelines for the Budgeting Adverse

A few weeks ago, I had a conversation with a recent college graduate who was preparing to buy his first car. He had an encyclopedic knowledge of every feature and option offered on each car he was considering and yet seemed unsure of the right choice. I asked what was the cause of his indecision and he said, "I know what I earn but I don't know what I can spend" (did I mention he is a very smart, young man?).
Budget Guidelines for the Budgeting Adverse - Parsec Financial

I gave him the standard 28/36 budget guidelines: spend no more than 28% of your gross monthly income on total housing expenses and no more than 36% on total debt. Considering the fact that my young friend is hoping to move out of his parent’s home within the year, I told him to make sure he included an estimate for rent and utilities and then factor in a car payment.

While a budget wasn’t first and foremost in his car-buying thought process, he began to understand that the car decision would impact the next item on his wish list, an apartment. This led to a conversation about budgeting, his dislike of spreadsheets and the tedious chore of tracking expenses. He seemed to be a perfect fit for the 50/30/20 plan.

From the book, All Your Worth: The Ultimate Lifetime Money Plan by Elizabeth Warren and Amelia Warren Tyagi, the 50/30/20 plan provides guidelines for spending and saving using after-tax dollars or take-home pay. The goal is to direct your monthly income so that 50% is allocated to needs, 30% to wants and 20% to debt reduction or savings. Easy even for those with an aversion to spreadsheets! The only trick initially is to properly categorize expenses so you can determine where your money is going and where you need to make adjustments. Here are the basic guidelines.

Allocate 50% to needs or essentials:

This category includes the necessities of life such as food, housing, utilities, insurance, car payments, gas and minimum credit card repayment.

Allocate 30% to wants or personal expenses:

Here we find cable TV, vacations and travel, sports tickets, unlimited phone plans, hobbies, restaurants, coffee shop visits, gym memberships, expensive haircuts and clothing.

Allocate 20% to savings and debt repayment:

This category includes extra money used to pay down credit card debt, creating an emergency or rainy day fund and saving for retirement.

While you may need something larger than a cocktail napkin to create your own 50/30/20 plan, you don’t need a spreadsheet to track every penny to get off to a good start. Give it a try and see where your money is going and where you may be able to adjust. It may even help you make better decisions like which car to buy.

Nancy Blackman, CFP®
Senior Portfolio Manager


Recent Posts:

How To Evaluate Taking on “Fun” Debt

Personally, there is nothing more relaxing and exhilarating than being on a sailboat with a 15-knot wind on your beam (side), listening to the soft sounds of water splashing against the bow and using wind energy to propel the boat forward.

Tax-Loss Harvesting Amidst Market Turmoil

Market declines like the one we are currently experiencing present great opportunities to take advantage of cheaper asset prices. Almost everyone with a taxable account should be harvesting tax losses during times like these.

“What If” Contingency Planning

We want to ensure you are thriving, as living a healthy and successful life is truly priceless. Of all the steps that can be taken toward financial security and peace of mind, planning our own death and incapacity is the least popular. Life goals dominate our consciousness, and these goals are often about ourselves. Estate planning is not as much about us as it is about the people and things that we love.

Recent Quarterly Newsletters:

Thrive By Ensuring Your Loved Ones Are OK Edition

Our Q3 2022 newsletter focuses on how to thrive by ensuring your loved ones are OK. In it, we have created an eight-page fillable guide you can create for loved ones to follow after you pass. We also provide other guidance on estate planning, caring for aging parents and preparing for a potential disability.

Thrive by Learning and Growing Edition

Read our Q2 2022 newsletter on how to thrive by learning and growing. CEO Rick Manske reflects on graduation season and what this time of achievement and change means for students and loved ones. CIO Bill Hansen writes about education savings; President Harli Palme writes about tax savings related to college expenses; Portfolio Manager Nancy Blackman cautions about hidden costs of college. Advisor Charles Thompson outlines why it’s important that we value and prioritize travel. Advisors Judd Meinhart and Hilary Daniel write about job transitions and what to do with your 401(k) and new benefits. Advisor Neal Nolan ends with 10 ways to celebrate Independence Day and we highlight announcements across our firm. We hope you enjoy this edition!

Recent Whitepapers:

Stay Up To Date With Parsec

Sign up to join our mailing list and receive quarterly newsletters, whitepapers, news, and more right in your inbox.
Scroll to Top

Not a Client But want to receive updates?

Please sign up to join our mailing list and receive our latest news, thought leadership content and invitations to upcoming webinars.