Life as a young adult is a roulette wheel and how to win this fun but high stakes game becomes mind boggling, especially when the initial excitement wears off. When this happens, living quickly becomes tepid. Poor money management is one of the reasons why this could become the reality of a young adult’s life. However, the thought of avoiding this potential pitfall should not make you feel nervous or terrified.
How to manage your money and live comfortably is not rocket science. Ask Jay-Z, Elon Musk, Jeff Bezos, or Warren Buffett. Right, a camel may get through the eye of a needle before you might get an audience with any of these guys!
According to Forbes, Jay-Z did not chance on his wealth because he “already had a blueprint for his own ten-figure fortune.” Musk did not inherent his billions from his parents. inews sums up his journey to wealth and comfort thus: “The South Africa-born entrepreneur has been hailed a genius by experts for his forward-thinking.” Bezos’ story was not different. Investopedia says the Amazon boss “always dreamed of creating something different.” Buffett’s story will amaze you because “he first bought stock at age 11 and first filed taxes at age 13.” It is never too early nor too late, right?
A common denominator is that each of them started with a dream, a goal and all worked towards the prize.
On the flip side, the four could have easily squandered away their initial thousands or millions, but they are celebrated today because they took the time to manage their vast wealth with the same level of discipline they managed their first tens, hundreds and thousands. You, too, can achieve this goal.
How do you manage your money, though, to be positioned to cash in on great opportunities when they arise? Well, understanding the difference between your needs and your wants is essential in setting up the stage. You need to learn as well to set some funds aside for the purpose of building your future.
Financial experts and advisors commonly discuss the 50/30/20 rule. It explains how you should apply your net income (as opposed to gross income) towards your needs, wants, and savings. These percentages might not be feasible while just starting off in life. However, you need to strive towards reaching that point in life where your income can be applied as such. Below is how the 50/30/20 rule plays out.
Financial experts and advisors commonly discuss the 50/30/20 rule. It explains how you should apply your net income (as opposed to gross income) towards your needs, wants, and savings.
Needs: 50%. Your needs comprise of the things you must have to live a comfortable life. No, this is not about Maslow’s Hierarchy of Needs. However, your basic needs include food (groceries), a roof over your head (rent) and associated utilities (electricity, water). Now, do not try to keep up with the Jones because one man’s need might be a want for you. For instance, a person in need of an emotional support or an eye dog is different from a person who simply wants a pet.
Wants: 30%. Your wants are things you can do without. Though they are nice to have, wants will not diminish your quality of life if you do not have them. These include dining out, shopping for the sake of shopping, pets, or hubbies. If your needs are fully funded, you must certainly set aside some funds with which to indulge in such things as your wants.
Savings, investments and paying off debt: 20%. The remaining 20% of your net income should go into paying off your debts or shoring up your savings and investments because you need to set aside emergency funds for the rainy day. This typically covers living expenses for a period ranging from 3 months to one year, depending on which school of thought you subscribe to. Basically, it is a good practice to save with a purpose. With sufficient funds set aside for emergencies, you can live stress free.
With our expenses clearly categorized into needs, wants and savings/ investments, you can move to the next phase – Budgeting.
See our article, Budgeting for Beginners for more on budgeting.