How to Live on $3,775!

Personal Finance Discussion

In my last post, “You want me to save $620 a month? How?”, I felt both your frustration and relief. The math seemed simple, but it didn’t feel realistic. And honestly, that reaction is exactly the point. Personal finance is personal and requires many more conversations.

I left you last time with the question, “Can you live on $3,775 per month?” I want to share how I would approach budgeting for that amount if I were to start today. My approach here is for people starting off their professional lives, and it might not be applicable to people with families and other obligations.

Let’s break it down.

Financial Recap

Let’s revisit our example:

• Gross Salary $65,000

• Annual take-home: $45,300 after deductions and contributing 6% to 401 (k) and 3% match by the employer.

• Monthly take-home: $3,775

From there, we apply the budgeting framework: the 50–30–20 rule.

The 50–30–20 Rule

Needs

Allocate 50% of your take-home to needs; that’s $1,888/month

This is your baseline life:

• Rent

• Utilities

• Groceries

• Transportation

• Insurance (be careful with insurance coverage; just as you can be underinsured, you can be overinsured)

• Minimum debt payments

Here’s the constraint most people don’t want to hear: If your rent is too high, the entire system breaks down.

Where you live matters, and roommates might be needed early in life. In my generation, it was common to have roommates. I gather that this isn’t as common as it used to be.

Roommates are not just a financial decision; they’re a life decision. They expand your network, your social exposure, and your opportunities. In your 20’s, that matters more than people realize.

In a city like Cincinnati, keeping rent around or below ~$1,200 is a realistic goal, even without roommates.

Wants

Allocate 30% to wants, that’s $1,133/month

This is where life happens:

• Dining out

• Travel

• Subscriptions

• Shopping

• Entertainment

The problem isn’t that people spend too much here; it’s that they don’t choose how they spend. This is also the category that is most likely to balloon because we do not track it well. If not managed well, this 30% can grow and creep into the next category.

Savings and Investment

Allocate 20% to savings and investing; that’s $755/month

• Savings

• Investments

• Debt paydown

Remember, you are already contributing $487 to your 401(k) through your employer. This is additional savings for emergency funds, additional savings & investments, extra payments toward debt, and short-term goals like saving up for a new car.

What the Budget Actually Looks Like

• Needs: $1,888

• Wants: $1,133

• Additional savings, investments, and debt paydown: $755

Total: $3,775

Retirement savings already allocated as employee and employer contributions to the 401 (k) in the amount of $487.

Total savings and investment $755+487= $1,242

The Part Most Advice Ignores

The 50–30–20 rule is not a law. It’s a diagnostic tool. I use it from time to time to make sure that I am aligned with my own goals. As your income increases, be cautious about where you allocate the additional funds. As my income increased, I allocated more to savings and investments. Recently, with rising grocery prices and travel costs, I had to revisit how I wanted to respond to these changes.

This framework can help shed light on some problems:

• If your needs are too high, it’s a housing or fixed cost issue. Consider making some changes. This category is difficult to change and will require creative thinking.

• If your savings aren’t happening, your wants are likely untracked. Start tracking your spending on wants; it is too high.

• If everything feels tight, your margin is too thin. With this model, every dollar will be accounted for. At first, it will feel like you are living paycheck to paycheck.

What You Should Actually Do Next

Here is the sequence I would follow:

1. Contribute enough to get your full employer match (you already are)

2. Build a 3–6 month emergency fund using your 20%

3. Start a Roth IRA once you build your emergency fund

4. Payoff debt

5. Gradually increase your 401(k) to 10–12%

Depending on your situation, 3 and 4 can be interchanged. Whatever you choose, be consistent.

Sound Financial Advice Online

There are so many ways to grow from here and so many other frameworks to apply. The Money Guys have the 9 Step Financial Order of Operations that I like.

1. Deductibles Covered

2. Employer Match

3. High-Interest Debt

4. Emergency Fund

5. Roth IRA/HSA

6. Max-Out Employer Plans

7. Hyperaccumulation

8. Prepay Future Expenses

9. Prepay Low-Interest Debt

Part 1 in the series

Part 2 in the series