Personal Finance

The 50/20/30 Rule and How to Do Better (Part 1: Tracking)

In one of my earlier posts, I discussed the 50/20/30 Rule and why we must do better. I will continue to build on that post by expanding on the steps to do this.

I’m a restoration ecologist. I live in my truck. Why would any of my financial advice be relevant?

My financial cred is born solely out of industriousness, frugality and self-teaching. Probably my most prominent bragging point is that I was able to make it through a bachelor’s degree without taking out a student loan. This didn’t happen on accident and my family is not loaded.

Many podcasts and blogs that I hear come from former corporate employees who used to rake in $100k and more a year and then opted for a simpler life to get out of the rat race. As a lower middle class person in a field where I never expect to reach $100k/year, I want to share my experience with others because it’s more applicable for my peers.

There needs to be more data out there for the middle class to easily digest and hopefully start to apply to their own situations. I want to contribute my experiences, techniques, successes, and failures to this pool of knowledge and show that with dedication and taking control of your finances, you can achieve your goals, even without a fat-cat salary.

I also want to help normalize and promote discussing finances and financial intelligence among millennials. It seems for people my age, if you weren’t taught about finances from your parents, then there’s a good chance you’ll never learn about it.

 

afford lifestyle meme

I am going to start demystifying this by giving you advice from my own experience and research.

Beyond that, 2.5 years of employing the tactics that I will be discussing in my blog posts has allowed me to achieve a 47% savings of my after-tax income so far in 2018. This fall short of my 50% savings goal, but setting that goal has allowed me to still save significantly more than I would have without a goal and budget.

Everyone knows that money can’t buy you happiness, but the lesser known truth is that money can buy your FREEDOM.

For most goals, be it paying off your student debt, saving for a down-payment on your house, moving to another country, or having the freedom to travel the world for a year, I would recommend setting your sights on saving 50% of your income. The first time that I heard about making a 50% savings your goal, I thought it was out of my grasp. I rolled my eyes and thought, well sure, if I had a sweet $100k salary a year that would be doable. But the thing is, I’m nowhere close to that salary and I’ve still set saving 50% of my income as my goal and have achieved that in individual months.

You cannot be complacent with your savings goals. Saving 10-20% of your income is still the mainstream advice, but it is no longer a realistic standard.

Establish your savings goal. Then bump it up a little higher. If 50% is too overwhelming, start with 30%.

 

Alright, where’s my soapbox?

I would love to shout from the mountaintops, “IT DOESN’T MATTER HOW MUCH YOU MAKE IF YOU DO NOT TRACK YOUR INCOME AND EXPENSES!!!”

Tracking is the horrible truth to managing your personal finances that you know in your heart, but don’t want to hear.

Before I can even dive into how to form your budget, you must have your personal data to work with. Luckily, online banking makes accessing this information incredibly easy. I use Excel to track my spending, which also doubles as my budget. But for now, make yourself an Excel spreadsheet to track your spending from the last two months. The process is tedious and it is normal to feel guilty for past purchases or dining out too much, but it is absolutely necessary.

My spreadsheet consists of three main categories, which I encourage you to use and customize: Fixed Spending, Flexible Spending, and Savings.

Subcategories:

Fixed Spending: Lodging, Groceries, Phone, Car Gas

Flexible Spending: Travel, Dining Out, Social/Gifts/Entertainment, Other

Savings: Retirement, Investment, Savings

Create your own subcategories, starting with bills that are fixed from month to month. Then, go on to labeling your flexible spending categories and then your savings section. Go through your transaction history for the past two months and line by line record your spending by categorizing them under your three main categories. Yes, even the $0.99 coffee from the gas station made it to my tracking sheet.

After you have completed this process, add up your totals in each category. How much does your lifestyle actually cost you? What is the total of your fixed expenses? Are you happy with how much you spend in each category, or are you seeing a pattern that you would like to change?

Before you are able to create and tackle a budget, you must track your spending to see where your money is really going. It is illuminating and will help you take control of your finances. Even if you don’t have access to your spending history, start tracking today! Update your spending sheet at least weekly to stay on top of it and spread out the amount of time it takes to populate. Definitely make sure it’s up to date before the start of the new month begins.

Happy Tracking!

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