Maeve* was 25 and earning her first paycheck. She wanted to learn more about budgeting and planning her money so that she could build good financial habits for the long term while still having enough for a nice lifestyle. We spoke to Maeve about how to get her finances organised.
The first step was to create a financial plan for Maeve. We did this by asking Maeve to track her cash flow: what was going in and what was going out. This helped her to gain a proper understanding of her spending and where her money was going.
Maeve learnt about the 50/30/20 method. This is the system favoured by many financial advisors where 50% of income goes to needs, including rent, monthly bills, transport, and any essential costs. 30% of take-home pay is allocated towards wants, which incorporates hobbies, gym membership, eating out, saving for holidays and clothes. 20% goes to financial goals including a pension, investments, making extra payments towards debts or savings.
Maeve tracked her spending for a full three months and learnt that she was spending about 30% of her take home pay on needs because she was still living at home, didn’t have any household bills and wasn’t paying any rent. Her biggest expense was her monthly phone bill, and she didn’t have any outstanding debt. However, Maeve was spending about 60% on wants including clothes and going out. For her next holiday she was consistently saving about 10% of her income a month.
There was no reason to increase Maeve’s needs budget, so she was advised to keep it at 30% for the time being. Looking at the numbers, Maeve decided that 60% on wants was not sustainable in the long run, but she wanted to remain flexible. She decided to drop her wants down to 35% so she could still have a nice social life and continued to track her spending. This left her with 35% of her paycheck. While she had no big financial commitments in the near future, she decided that she would continue to save 10% for her next holiday and 5% into a high-yield savings account that could be used for a home deposit sometime in the future.
Maeve chose to avail of her employer pension scheme and began to contribute 20% of her salary towards her retirement fund. Her monthly contributions had a tax relief of 40%, and since she started her pension so early, she was in a great position to gain from the long-term growth and compound interest of her final pension pot.
Maeve didn’t need to enforce a strict 50/30/20 spending plan to make her budget work well for her. She remained flexible and implemented good financial habits for the long term.
*Names have been changed to protect client anonymity.