When I was in college, I saved $15,000 in two years on a low salary. My secret? I learned to budget. As a business major, I have always been interested in finances. I took several investing and accounting classes in school, but it wasn’t until I started managing my own money that I learned a very important lesson:
How you manage your money is more important than how much you make. Let me explain. Your income determines the things you can afford and the things you can’t. However, lifestyle is something completely different.
During the time I was in college, I was dating someone who had a fancy internship and was making four times my income. However, my significant other didn’t have any money left at the end of the month. The worst part? He had no idea what he spent it on!
I, on the other hand, was very careful about everything I spent. I didn’t deprive myself of the good things in life. I traveled often, bought groceries, went out with my friends, shopped at the mall, and still had money to save. My secret? I learned the 50/20/30 rule:
After taxes, 50% of my income is spent on needs, 30% on wants, and 20% to savings. This is the key to budgeting.
So it works like this:
- Needs – 50% of your income should be allocated to this category. This includes everything thing that is a necessity such as food, rent, electricity, doctor appointments, transportation and other bills.
- Wants – 30% of income should be allocated to this category. This includes everything that you want but is not a necessity such as dinners out, movie nights, that expensive perfume you want, trips etc. As long as you’re not exceeding 30% of your income in this category it doesn’t matter how much you spend on wants.
- Savings – 20% of your income should be allocated to this category. I learned early on the importance of saving. This category includes saving, investing, and debt.
Although the percentages are the maximum amount that should be spent in each category, you can adjust each category to fit your needs. Read more about budgeting here.
So why is the 50/20/30 rule important? It doesn’t matter if you have a $200,000 yearly income if you have been spending $250,000 per year. Someone with a $150,000 income that uses the 50/20/30 rule would be better off! Budgeting is essential to have a healthy financial situation. I can’t stress this enough.
You don’t have to have a degree in Finance to manage your income like a pro! With the 50/20/30 rule, it doesn’t matter how much you make. You can save as much as I did or even more!
The important thing is that I stick to my budget and was able to manage my finances in a way that I had enough to do everything I wanted.
I also took advantage of every passive income strategy I knew. I earned Cashback from Lemoney, got paid to participate in surveys, and became a loyal reader of The Financial Diet and The Penny Hoarder.
If you want to learn more about saving money, read our blog post about why you should consider a frugal lifestyle.
Do you have an incredible story about managing your finances? I would love to hear it! Let me know in the comments below.