Your first instinct may be to use the entire thing to pay off part of that epic student loan, but here’s how to divvy up your paycheck the right way—so you can cover rent on your pad, debt repayments and those requisite happy hours.
When that first huge chunk of money hits your bank account, you may just get stars in your eyes. Suddenly, table service every Saturday night, a sweet loft and a rotating tie rack of Hermés ties (or Theory blouses, if you’re of the female persuasion) all seem within reach.
But think back to your bankruptcy law course. It’s crazy how people can blow through all of their assets, right? To avoid the same fate, take this quick crash course in how to divide up your earnings like a boss—ahem, partner.
For starters, let’s discuss some general guidelines, which make up what we like to call the 50/20/30 Rule:
50% Should Go Toward … Essentials
At LearnVest Planning, we define essentials as the stuff you need to live, so cocktails with coworkers don’t count. This category includes housing (e.g. rent on your swank digs or mortgage payments), transportation (gas, public transportation, car insurance), utilities (electric, gas, water) and groceries (anything that comes from the grocery store).
So you should aim to spend no more than half of your take-home paycheck—that’s after taxes—on these things. In other words, if your rent is equal to 45% of your take-home pay, then you should probably downgrade.
20% Should Go Toward … Financial Priorities
Is your dream to someday quit law and open a farm-to-table restaurant? Or maybe you’re hoping to take an amazing trip around the world . . . when you finally retire. These all fall into the financial priorities category—along with those crippling student loan payments. Bottom line: At least 20% of your take-home pay should be set aside to reach your major financial goals.
30% Should Go Toward … Lifestyle Choices
Now for what you’ve really been waiting for … After you’ve paid for the essentials, and set aside money for financial priorities, you should aim to use no more than 30% on whatever else your heart desires. This includes—but is not limited to—happy hours, work clothing, travel, takeout, HBO and the gym membership that you’ll probably never have time to use.
What’s That? This Isn’t At All Realistic?
Yeah, we hear you. Especially those of you who are laboring under large student loan payments that make up 20% of your paycheck alone. Here’s what you need to keep in mind: The 50/20/30 Rule is a broad guideline, so you might have to tweak it to line up with your individual situation.
Notice how we said at least 20% on financial priorities, and no more than 50% on essentials. So if you have big loan payments, you may have to get a roommate or live without cable for a bit to make it work. And note that even if your debt repayment is bordering on 20%, you also need to be saving for emergencies and retirement!
Why It May Be Time to Call in a Pro …
Since you’re a lawyer, and not an accountant, you may have considered consulting a financial planner. Of course, the problem with many money advisors is that they work on a percentage model. Translation: “You give me assets, I trade stocks for you and I charge you 1% of your assets—even when those stocks tank.”
To get you on the right track—i.e. paying down that student loan debt in a manageable way, while also saving for a condo—you need advice on budgeting and building out a 5-year plan. Lucky for you, LearnVest Planning offers fee-based financial services for a fraction of the gym membership that you’re not using.
Intrigued? Start with a free financial consultation by filling out this quick profile.
Looking to get your finances in order quickly? Come join us for a Planning For Your Future talk in our NYC office on 25 March 2013. We’ll have our financial experts on hand to give must-have advice on maximizing your wallet today and planning for tomorrow.
RSVP by Mon 18 March to firstname.lastname@example.org
- Location: LearnVest – 113 University Place, 5th floor, New York, NY 10003 (Union Square)
- Time: 7.15-8.30pm. Financial advice session will begin at 7.30pm,
- Free admission – beverages and light snacks will be provided