As a young professional with many competing expenses, it is paramount for me to prioritize my spending. However, adhering to a strict budget can seem a bit daunting and restrictive. To get over this anxiety, I started out with a spending plan that mirrors the “50-30-20 rule” by allocating money into three different buckets: things I have to buy, things I want to buy, and things I should buy. Let me explain.
Category #1: Things I have to buy
This category is for my fixed expenses. It includes the bills and necessary purchases I must make to survive. This includes my monthly rent and other bills (like electricity, internet, water, and sewage). I also use this category to pay for groceries, gas, and different types of medical insurance (i.e., vision, dental, and disability). For young adults just starting out in their careers, this category of fixed, necessary expenses can take up about 50% of your take-home pay. For young professionals established in their career, it may be a much lower percentage. For me, this amounts to about 45% of my take-home pay.
Pro tip: If your fixed expenses add up to over 50% of your income, consider ways you can cut costs or increase your income. I tried to do both. In order to decrease costs, I decided to live with a roommate. This not only lowered my monthly rent payment, but it also allowed me to split many other bills, which substantially lowered my living expenses. Along with decreasing costs, I also created a second source of income. As a resident physician with limited free time, I couldn’t get a second job, nor did I want to. Instead, I decided to turn something I love (blogging) into a second source of income by monetizing my blog and accepting paying offers to write for other platforms. Whether you enjoy writing or have another area of interest, think about what you love to do and consider different ways you can turn your hobby into a second source of income.
Category #2: Things I want to buy
This category is for my discretionary spending: non-necessities that increase my quality of life. These expenses can differ for each person, but for me, they include: entertainment (like weekend outings to the movies, sporting events, and restaurants), self-care (like personal grooming, hair appointments, and gym memberships), and incidentals (such car maintenance, birthday gifts, and other unexpected expenses). This is also the area I dedicate to give. As a Christian, I try my best to give to the less fortunate and donate to organizations that do the same.
Pro tip: Everyone’s list of discretionary spending may vary. I choose to drive an older car and spend extra money on entertainment and self-care. You may, instead, choose to drive a much nicer car and opt for a car payment. The items you choose to purchase can differ from mine. The goal is to keep your discretionary spending to about 20-30% of your take-home pay. Mine is 25%.
Category #3: Things I should buy
This category is for monetary growth. It is the part of my take-home pay I use to increase my net worth and build financial security. This can be done in a variety of ways, but I use this section of my budget to save, invest, and pay down debt. For example, I put a certain percentage of money into an emergency fund and secondary savings account (which I will use for unexpected expenses, a future vacation, a house down payment, etc.). I also allot a portion of money from this category to invest in my employer-sponsored retirement account (which is a 403b retirement savings plan through which I invest in a combination of stocks and bonds). Lastly, I use this category of money to pay down student loans and credit card debt.
Pro tip: You can increase your net worth by either paying down debt or increasing your investments. I do both. The goal is to reserve at least 20% of your take-home pay to this category to ensure you have an adequate emergency fund and are saving enough money for retirement. Since I was unable to work during my time in medical school and incurred some credit card debt when I moved to another state, I am allotting about 30% of my budget to this category to “catch up.” However, your exact percentage may differ from mine. You may need to start off by allocating a much smaller amount to this category and increasing the percentage over time.
Generally speaking: The amount you allot to these three categories may vary. The important thing is to make sure you have a portion of your budget reserved for all three areas.
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