15% of your income = freedom
What I mean by freedom: control of what you do with your money and the ability to reach your personal goals. Snazzy? Yes.
Here’s what we’ll talk about today:
- What is this 15%?
- How do I implement it in college?
- What should I use it on?
- The future
What is this 15%?
Very simple – it comes from the notion of Pay Yourself First. This means that every time you receive your income, you allocate 15% to yourself. Yourself means your goals: paying off debt, a new car, investments, a nice trip, etc.
The thing is, you allocate that money away the second you receive your paycheck/loan. You can’t spend it on going out, food or rent. That money is for the very personal goals, the ones with a future. This is why it’s part of the Adulting section of Financially Mint.
How do I implement it in my early twenties?
You work on your 15% through your budget. And guess what, it’s super simple and only takes 10 minutes.
I dedicated an entire section to it on this website, so check out the Budgeting in 10 minutes page.
The magic of this is that by first saving and then spending, you are prioritising your long term goals, you’re putting yourself first. And getting into this habit at such a young age is… priceless.
The other magic part of this is that there’s no more stress about ‘oh damn, I didn’t save a lot of money this month’, because every month you’re automatically putting away that 15% somewhere safe. And by giving yourself less to spend, it’s hard to go over budget.
It’s pure magic 🧙
What do I do with the 15%?
Aha! Very good question. So this 15% is very valuable. It may not seem like a lot of money at the beginning, but as it accumulates it can produce a pretty neat pile of cash. If you want to take #responsibility to the next level, here are some steps to figure out the best way to use that 15%.
1. Build a cash cushion
There is nothing like having an extra £500 stashed away for emergencies. Anyone who’s had a breakdown because of a sudden £200 expense will understand this.
It helps you sleep at night, it builds confidence about your money management skills and it literally is the way to #winatlife. Here’s how to guide to building your own cash cushion.
2. Pay off debt
If you’ve got credit card debt or other consumer debt, get rid of it immediately. It piles up very quickly and will only cause misery.
If you’ve decided you’re going to pay off your student loans, use this extra money to get rid of it as soon as possible.
The next best thing to do with your money is invest it: put it into low cost index funds and watch the money pile grow. Once your emergency fund is in place and you’re happy with your debt situation, set up a direct debit to the investing platform; the minute you get your paycheck and calculate that 15%, send it off to Vanguard or whichever platform you use. As the months go on, you’ll accumulate a nice amount of assets which will also be earning interest for you. You can then use this money for the future: buy a house, save for retirement, emergencies, etc. Sounds overwhelming? Don’t worry, I’ve got an entire section that teaches you how to get started with investing: #Adulting.
4. Treat yo’self
Yes, it’s important to treat yourself. It may be the fourth in the list but I’ll explain later how you can be responsible and get some nice treats as well. What do I mean by treats? An exciting trip to the other side of the world, a car, a new laptop, etc.
The best part is that you’ll be turning this consumerism into delayed gratification: every month you put some money away for that exciting BIG THING until you can finally afford it. And you’ll proudly be able to say: I bought it with my own money and I bought it responsibly. #adulting.
5. Money Experiments
This is for the money geeks (#me). Really interested in learning more about the money and what you could do with it? Why not use some of it to experiment? This could mean starting a new side-hustle, something like peer to peer lending, investing in something riskier (crypto?). I do recommend doing the responsible stuff first: make sure you’ve paid your debt off and your emergency fund is in place. And then use the money for your financial education: try some new things, buy some books, attend some seminars. Many times that’s the money best spent; the future returns could be way higher than you imagine.
So these are 5 things you can allocate your 15% to. And once you see all the exciting things you can do with that extra money, you realise that it does not have to be 15%. It could be 20%, or 30% or even 50%. This isn’t the easiest thing to do on a meagre shoe string budget, but once you graduate and earn some good money, working towards a high Pay Yourself First percentage will get you very far.
The thing is, it’s not easy to choose what to allocate that 15% to. You could say ‘But I wanna do all those five things!’. Well, the good news is: you can. Really, there are two ways you can do this:
- Go through the list one by one: first build an emergency fund, then get rid of debt, then start investing, then treat yourself and do a lil’ bit of experiments.
- Break down your 15% into smaller percentages for each goal
Jimmy wants to pay off his credit card debt, build an emergency fund and buy a trip South America. He has 15% every month to work with. Going on from his income of £850, this means he has £127.5 every month. He decides to divide it up:
- Half will go to credit card debt.
- A quarter will go to building his emergency fund.
- A quarter will go to a savings account for his trip to SA.
Here’s a lil pie chart:
And so every month, he calculates his 15% and then makes sure the right amount goes off in the right direction. Pretty cool.
And if you want to use more of that money, you can! It’s all up to you where you put it. The more the money works for you the more you’re winning – freedom.
The future = freedom
Another great part of the 15% rule is how ready you’ll be once you graduate. Not only will you be used to allocating a percentage of your income to yourself, but you’ll have this cushion of money that’s been working for you. Thanks to the emergency fund you won’t be in too much rush to find a job, with 2-3 months of expenses ready for you. If you already started investing it won’t be so unfamiliar to you once you start working – and that money will keep earning interest. You also know how to get those treats in a more responsible way: by working towards them up bit by bit.
This is what I mean when I say freedom: you are no longer stuck to a job to get what you want. If you don’t get your paycheck one month, you’re ok. If something breaks down and you need to replace it, you’re ok. And you’ll (hopefully) aim to accumulate some wealth for the future, so future you will be ok.
This extremely simple 15% rule is the secret to being financially responsible, to being financially intelligent and independent. And you can literally start right now!