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:

10 Ways to Celebrate Independence Day

I proudly served in the U.S. Army from 1991 to 1992 as a medic. My time serving makes me appreciate being a U.S. citizen. This holiday, I hope you do something enjoyable with family and friends. Here are ten ideas — I will likely do a mixture of them all!

Recent Quarterly Newsletters:

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!

Thrive by Planning for the Unknown Edition

Our Q1 newsletter focuses on planning for the unknown. CEO Rick Manske begins with outlining the importance of implementing financial family fire drills. Sr. Financial Advisor Travis Boyer writes about handling risk and Director of Investment Management Sarah DerGarabedian discusses mindful investing and how according to Seinfeld, “Anything’s possible!” Financial Advisor Scott Kittrell outlines how to manage the increasing cost of health care, and Sr. Financial Advisor Michael Baughman covers how to determine if you need health insurance. Manager of Financial Planning Judson Meinhart provides helpful tables to fill out to determine if you have adequate property and casualty insurance. Co-Director of Tax Services Larry Harris writes about tax planning unknowns. We hope you find this edition insightful!

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.