As an adult, there are a few things in life (let’s be honest, a LOT of things) that I look back on and think “wow, you were kind of a moron. How in the world are you still alive?”
From the words I said to my everyday actions, my arrogant teenage years and early 20’s were filled with short-sightedness and a seemingly lack of common sense. I seemed to float along, pretending to know about everything, but was somehow clueless that blowing through $100k was a bad idea…? I also made a habit out of ignoring good advice, and would retort with things like “just let me live”, which actually means “stop showing me how stupid I really am.”
So I know how hard it is to get young adults to pay attention to something that has the potential to COMPLETELY ROCK THEIR WORLD. I bypassed so many pieces of good advice, only to regret it later and realize that there are people out there that know A CRAP LOAD MORE THAN I DO. And that’s a good thing, otherwise I would have to figure out everything that hard way.
So if you’re a young adult who wants to do the money thing right, and only do it once, please listen up.
The 50% Rule Of Spending
Today’s financial rule isn’t something I even had the opportunity to hear about as a kid, though I probably would have dismissed it anyway. But it’s one of those things that would have completely changed the financial trajectory of my life, landing me in a MUCH better place that my current position, and would have created the one thing everyone pursuing financial independence dreams of: CHOICE.
That rule is the 50% Rule Of Spending. And it’s so simple, it hurts. No really.
“Only spend 50% (or less) of your take home pay. Always.”
I can already hear the exasperated sighs. “Or sure, no biggie. I’ll just take my already crappy pay and figure out a way to only use half of it. As soon as I find free housing and free food, I’m set!”
I understand. I’m right there with you. But let’s look at this from the perspective of following this rule from our very first paycheck.
Case Study: The Kid Who Followed The (50%) Rule
Tommy was an average teenager. He went to school, hung out with friends, played in the marching band and hated his parents taste in music. He didn’t know much about handling money as his parents never really talked about it, except “no, that’s too expensive”, and “stupid government keeps taking all our money!”
But one day through a friend on Facebook, he stumbled across www.iheartbudgets.net and read a post about The 50% Rule. He decided that Jacob character knew what was up with money, and decided to follow his advice.
That summer, he got his first job making $9 an hour at a local grocery store. He averaged about 20 hours per week, and his take home pay per week was about $153. So his monthly income was $612.
Tommy still lived at home, and had almost no expenses. He did want a car at some point, so he decided to save as much as he possibly could. He used his money to occasionally eat out with friends and go to a movie. He allocated himself $30 spending cash per week, and was still able to enjoy all the normal activities a teenager does. He was spending $120 per month (20%).
Tommy had also read Jacob’s posts on how awesome used cars are. So he bought a used 1995 Honda Civic for $1,200 after only 3 months. But now he had to add insurance and gas to his monthly bills. His parents added his car to their plan, and he paid $80 per month for liability only (teenagers are expensive!). But since he knew the value of financial freedom over driving his car to school every day, he chose to ride the bus or with friends. He only spent $30 per month on gas. He was spending $230 per month (38%).
Tommy finally graduated and joined a local community college. Since his parents didn’t have the extra cash, he paid for his schooling out of pocket. He knew this going into it, and was applied to 2 scholarships a week his senior year. He was awarded enough money to pay for tuition and books. At this point, he got promoted to cashier, making $12 an hour, taking home $816 per month. He still lived at home, which kept his expenses pretty minimal. The allure of freedom from his car had worn off a bit, and he got a bus pass for $80. This kept his gas bill at $30 per month. He was spending $310 per month (38%).
Tommy transferred to a 4-year, in-state college, and obtained scholarships to pay for 75% of his schooling this time. The remaining amount was $3,000 per year. Since he had been saving for the past 4 years, he was able to pay cash for the rest of school, leaving him with no student loans. W00t!*
Having been following the 50% rule helped Tommy build a habit of never having to touch half of the money he earned. He had even set up an automatic transfer of 50% of his paycheck to go directly to his Vanguard investment account. But now he was about to get a “real job” and move out, reality was about to kick him in the teeth!
Tommy didn’t really care. Being the smart cookie that he is, he got a degree in a technology field, and was able to land a job at a large company for a whopping $45,000 per year. BOOM! With health insurance and taxes, his take home pay was $3,000 per month. But now he had to fend for himself on $1,500 per month (or less). He’s screwed.
50% of Income: $1,500
Cell Phone: $25 per month (from Republic Wireless)
Car Insurance: $80
Bus Pass: $80
Spending Cash: $120
Total: $1,175 (39%)
The 50% Rule Is Possible, And Should Be Required!
Tommy has absolutely no debt and is living on less than 40% of his take home pay. He is enjoying life, has plenty of spending cash, and is building a life toward financial freedom that most people can only dream of.
There’s no magic here, just a commitment to use artificial scarcity to achieve some lofty financial goals. But where does it go from here? The sky is the limit.
According to Mr. Money Mustache, if Tommy keeps his expenses low, he can retire in like 12 years! Or he can buy a $150,000 house WITH CASH in 5 years.
The point is, by following this painfully simple rule, Tommy has the choice to do most anything he wants to do at a VERY young age. Retired in his mid-30’s, Tommy can pursue whatever passion he wants without any financial worry, because he has taken care of business since that first paycheck hit his hands.
This rule should be REQUIRED for anyone to understand before receiving a paycheck. The power of building good money habits early can have tremendous impact on your financial future.
What About Me?
This is the same question I’m asking myself. I wish I would have read this post when I got my first job at age 16 as well. Even now, I am spending much more than 50% of my income, and am in discussion with my wife about how we can build a lifestyle to allow us to follow this rule. Mostly, it includes moving, lowering my recurring expenses a little more and increasing income.
So what about you? Are you working toward getting to this place? What would it take to spend less than 50% of your take-home pay? What would you have to change in your budget to get there?
*Yes, this is a mighty big assumption. But if Tommy is diligent enough to live on less than half his income, he is also diligent enough to apply to 2 scholarships per week and pay for school in its entirety. There are literally hundreds of MILLIONS of dollars of scholarship opportunities, Tommy is just grabbing his piece of the pie.