Financial advice isn’t an exact science, so it’s hard to really sift through the cruft and know what you should do with your money—especially if you’ve never had enough money to make an actual budget. We asked three different experts for their thoughts on what a recent college aged grad (or dropout for that matter) should do with an average post-college salary. Here’s what we learned.
We talk a lot about budgets and investments, but if you’re just entering the real world, it’s probably the first time you’ve had actual money to budget—and you probably have no idea where to start. In the spirit of three households, three budgets, we decided to get advice from three financial experts to see how they’d spend their money in their mid-20s.
We spoke with three experts, Ramit Sethi, author of I Will Teach You To Be Rich, Bill Schultheis, author of The Coffeehouse Investor – How to Build Wealth, Ignore Wall Street, and Get On with Your Life, and Arthur Isabella, author of FAFSA Made Easy: Getting the Most Out of College Financial Aid. Here’s how each of them recommend you spend your money.
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Ramit Sethi: Divide Your Spending Into Four Categories
For the most part, Ramit Sethi is against budgeting because most people simply aren’t good at following a budget. That said, he sent us the above graphic as an example of how a recent college grad or younger person should be thinking about spending.
The breakdown isn’t exactly what you’d usually expect to see. Sethi describes his approach as a “conscious spending plan” and it’s what he recommends for younger people. The bulk of your income (about 50-60%) should go to fixed costs. This includes rent (or mortgage), utilities, cell phone, medical insurance, car payments, loans, groceries, clothes, internet, and other things like that.
Next up, Sethi recommends dedicating 10% of your income to investments (after taxes). This includes a 401(k) or Roth IRA (individual retirement plan). If you haven’t started a 401(k), it’s a really good time to start and we’ve got you covered on understanding the basics.
Next up, Sethi recommends you set aside around 5-10% for your savings. The specifics are really up to you and depend on what you’d like to do in the future. Sethi suggests 20-somethings think about saving for things like vacations, a down payment on a house, a wedding, and unexpected expenses.
Finally, Sethi’s last category is for guilt-free spending. Everyone needs a little fun money, but 20-somethings are going to blow through it more than others might. This includes covering expenses like bars, movies, taxis, games, and whatever else you like to blow your cash on.
Sethi’s approach is all about spending a lot on the things you love, cutting costs on the things you hate, and still saving for the future. If you’d like to read some more about his “conscious spending plan,” he’s giving Lifehacker readers a free copy of that chapter of his book here.
Bill Schultheis: Save Some for Later, but Invest Now
Bill Schultheis’ approach is a bit different than Sethi’s, and definitely more controversial. While he recommends a similar formula for budgeting, he also suggests that you can invest in the stock market and mutual funds early if you’ve got the mind for it.
Like Sethi, Schultheis recommends investing 10% of your salary into a retirement plan like a 401(k). He also recommends paying down debt at pretty much any rate you can handle. It might sound odd to invest and pay off student loans at the same time, but we’ve mentioned before that it’s possible (and often a good idea if your loan interest rate is low enough). Once basic living expenses, debt repayment, and long term savings are taken care, he says he’d invest:
Building a portfolio is the easiest part of this exercise. One mutual fund (yes, only one!) will allow you to build a simple and sophisticated portfolio that rivals the best portfolios owned by billion dollar college endowment funds and pension funds. I like this Vanguard Target Retirement 2055 Fund.
One final thought I’d like to share with young investors: On many occasions I hear comments by younger investors that they don’t want to lose money in the stock market. I’d like to turn this thought upside down, and suggest that you DO want to lose (some) money in the stock market. If I was to start investing in the stock market at 25, I would hope that I lose half my portfolio or more early on. This allows me to invest my future contributions at much lower levels, which will almost certainly generate much higher portfolio returns with the additional contributions down the road.
Schultheis’ portfolio consists of four low cost index funds rolled into one simple investment, allowing you to completely ignore the short term swings in the market. Instead, you can focus on the daily decisions you make in your everyday life around saving and spending, factors that you have a degree of control over, and impact you most of all. You don’t have to use a lot of money to do this, either. The stock market certainly isn’t the easiest thing to get started with, but we’ve put together a starter guide to set you off in the right direction and highlighted a number of other ways to put your money to work for you.
Arthur Isabella: Implement the 50-30-20 Plan
Arthur Isabella recommends the same basic budgeting rule as Sethi: 50% to fixed living costs, 30% to fun stuff, and 20% into retirement and debt management. His method for doing so is a bit different, however:
Regardless of the budgeting school you subscribe to, use the Envelope Method. It is best to recognize that your money is coming in and being spent in a closed ecosystem. That shirt you buy doesn’t get paid for magically—it’s money for electric, or groceries, or for cable.
Isabella also suggests setting up multiple budgets,…