When it comes to this time of year, do you take an “It’s the holidays, time to splurge!” approach? If you’re nodding your head yes, read on. We here at Style Salute love shopping, especially when it’s for family and friends, but a series of small purchases can easily add up and chip away at your budget (AKA money you could be saving and investing for the future). Knowing how much to spend on gifts and activities can be complicated — especially during the holidays. But there’s a simple tip that will make getting through this season without wiping out your bank account a little easier. Financial experts advise that you follow the 50/30/20 rule, and Sallie Krawcheck, CEO and cofounder of Ellevest, an investing platform for women, agrees.
The rule is straightforward: “Fifty percent of your take-home pay should go to your needs: rent, food, insurance, and other basics. Thirty percent goes to fun. And 20 percent goes to your future,” Krawcheck says. Follow this rule of thumb and you’ll be set up for financial success over the course of your life.
50 percent: The Essentials
Half of your net income should cover the essentials. What exactly is an “essential”? These are necessities that you can’t avoid budgeting for, and some examples include housing, food, utilities, and clothes. Following the 50 percent essentials rule will provide you with a strong benchmark for your true living costs.
30 percent: Personal Expenses
Yup, you read that right. Spend this money on things that are fun, like trips, dinners out with friends, and concerts. This bucket should also incorporate your holiday shopping needs — whether that means decking out your decor or buying lavish holiday gifts for the ones you love.
20 percent SAVINGS/investing
Investing is key for funding your personal life goals, like buying a house, taking a big vacation, or starting a family. Women keep more than 70 percent of their money in cash, whereas for men that number is a lot smaller, says Krawcheck. This doesn’t bode well for the women. “Cash today earns about zero percent. At Ellevest, we believe a diversified investment portfolio of stocks and bonds will return [about] seven percent. The difference between seven percent and zero on a double-digit percentage of your wealth is quite large,” Krawcheck explains. “Put another way, if you’re [making] $85,000 a year, and you wait 10 years to invest — and you’re putting aside 20 percent of your income as experts tell you to and you leave it in cash — over that decade while you’re waiting, it’ll cost you $100 a day.” (Yes, really.)
If you’re in a place where you really can’t spare 20 percent of your take-home pay going toward savings, you’re not alone. But Krawcheck says you can still invest. “Many young women feel like they can’t start with 20 percent. So start with one,” she says. “Everybody can do one percent of their take-home pay. The amount can debit from your bank account as soon as it’s in there, and then a couple of months later, take it to two percent. Three percent. Four percent. And make it a habit, so that it just comes out of every paycheck.”
Armed with this budgeting tip — and knowing what percentage of your income should go toward holiday shopping — you can head into the next several weeks without worrying about overspending, so you’ll be able to thoroughly enjoy the season.
Want to know more about how to manage your money and career? In addition to being an investment advisor, Ellevest is a resource on topics like goals-based investing and your finances overall, as well as your life and career. Sign up to get your free financial plan from Ellevest today.
(Photos via Getty and Ellevest)