Managing on a Budget: A Realistic Guide on Managing Your Salary

managing on a budget

By the very nature of money, you’re unlikely to feel like you ever have enough of it. Some of that feeling might be in your head, but other parts of it are very real – rising inflation, stagnating wages. That’s why, even if you have a solid $50,000 per year salary, making your ends meet can seem challenging. It’s a battle that gets much easier if you set yourself a robust $50k a year budget. Managing on a budget, here’s how to do it.

Is 50k a Year a Good Salary? 

Yes, a $50,000 annual salary is good. Admittedly, given inflation, earning $50,000 a year gives you a bit less spending power than it once did. But it’s certainly enough income for sustenance. That’s especially true if you consistently set aside certain percentages of your take-home pay to cover your living expenses. 

What Can You Afford Making 50k a Year? 

It’s common for people to ask what they can afford on a $50,000 salary. The answer to this question is at once straightforward and complex. 

It’s straightforward in that personal finance experts have consistently suggested setting aside certain percentages of your take-home pay for each of your expense categories. It’s complex in that doing so can require some tedious calculations – and that you might ultimately need to spend outside these limits. After all, if your expenses exceed certain budgeting caps, lowering these costs is often easier said than done.

Creating a 50k a Year Budget

An effective $50k a year budget comprises nine categories. You might also wind up adding additional categories that reflect your unique circumstances. 

For example, maybe you’re among the 6.9 million Americans who pay child support. However, since this number comprises just two percent of the 329.5 million people in the U.S., most personal finance experts overlook it. Of course, that doesn’t make it matter any less to you. If anything, you may need to lower your discretionary spending budget to accommodate your child support payments.

All that said, here are the nine key buckets into which you should sort your monthly $50k a year budget. Keep in mind that an income of $50,000 annually is $4,166.67 per month.

1. Taxes

You know the saying: “Nothing can be said to be certain, except death and taxes.” That’s why taxes should be your first monthly budget item.

If you earn your $50,000 income through full-time employment, your federal tax rate will be 22 percent. You may also be subject to additional state and local taxes. Add these rates to your base-level 22 percent to determine the total amount of your monthly income to set aside for taxes.

Your tax situation may work differently if you’re self-employed or freelance. In that case, you may owe additional self-employment taxes since you don’t have an employer matching your Social Security and Medicare taxes. You’ll have to cover what that employer would normally cover, though you can claim a portion of these taxes as a deduction.

2. Emergency Funds

Personal finance experts advise people of all income levels to set aside money for an emergency fund. You should put between 10 and 15 percent of your monthly income toward this fund. On a $4,166.67 monthly salary, these percentages translate to, respectively, $416.67 and $625.00.

If this amount of money sounds like a lot to set aside, know that it might be a temporary burden. Once your emergency fund covers the cost of three to six months of your typical living expenses, you can stop adding to it. The more of your monthly income you funnel to your emergency fund now, the sooner you can stop contributing.

3. Long-Term Savings

A theory known as the 50/30/20 rule governs the amount of your income you should set aside for long-term savings. The “20” in this rule’s name signifies that you should put 20 percent of your monthly income into your savings account. On a $4,166.67 monthly income, that’s $833.33.

If you make monthly debt payments, you should subtract their amounts from the total you set aside for savings. For example, if your monthly student loan payment is $300, you should put aside $833.33 – $300 = $533.33 for savings. Do so after, not before, your loan payment goes through.

4. Rent or Mortgage

Many finance experts suggest setting aside 30 percent of your income to cover your rent. Given this advice and your $4,166.67 monthly salary, you should set aside $1,250 of your monthly income for your rent. 

If you own your home instead of renting it, this figure decreases to 28 percent for your mortgage. On your $4,166.67 monthly salary, that’s $1,166.67.

5. Utilities

Rent and mortgage payments don’t cover the entirety of your housing costs. Utilities such as gas, electricity, internet, and water also factor into your housing budget. (Water may not be a concern if you rent, as many landlords will cover it entirely.) 

Utility expenses are, by their very nature, highly variable. As such, percentage-based rules for utility payments might not be helpful. You may fare better following some national utility bill averages.

As of November 2021, the average monthly cost for electricity is $114.44. The equivalents for gas, internet, and water are, respectively, $63.34, $59.99, and $70.93. If you pay for trash collection, you should also categorize this payment as a utility bill and set aside $14.03 per month.

Additionally, since internet service providers often offer cable access, you could classify TV as a utility. However, streaming services are becoming more popular than cable, and their average monthly cost is $47.43. You may want to add this item to your budget as well.

6. Insurance

Chances are you’ll need to pay out of pocket for several insurance plans. For example, if you don’t have employer-sponsored health insurance, you might buy your own through the marketplace. The average individual plan costs $462 per month. However, tax subsidies may lower this amount, as may variations among state insurance marketplaces.

You may also need insurance for your car, rental property, or home. The average monthly cost of car insurance is $139.50 per month.  The average monthly cost of renters insurance is $187 per year, or $15.58 per month. The average monthly cost of homeowners insurance is $109.

7. Transportation 

Unfortunately, getting around isn’t free unless you walk or bike. (And if you bike, you probably paid a good amount to get your bike in the first place.) The good news is that you can buy a car on a budget, though you might need monthly loans to do so. The average cost of monthly car payments like these is $568 for new cars and $397 for used cars.

You’ll also need to account for vehicle maintenance, which, according to AAA, costs 9.55 cents per mile driven for new cars. When you multiply this figure by the average 14,263 miles the average person drives per year, you get $1,362.12. The equivalent monthly cost is $113.51. 

You can avoid these expenses if you rely on public transportation, which can be highly affordable and accessible. For example, in New York City, the subway and bus system operates 24/7, and an MTA monthly unlimited pass costs $127. That’s less than the average monthly cost of car insurance alone. Of course, not nearly all regions have reliable public transit, but in areas that do, using it is often the wiser budgetary decision.

No matter your transportation method, experts say you should cap your transportation spending at 15 percent of your budget. However, data from the U.S. Bureau of Labor Statistics shows that most households spend 15.9 percent of their income on transportation.

8. Food

Some experts recommend spending no more than 10 percent of your income on food, which may sound low for something so vital. However, in 2020, the average household spent 8.6 percent of its disposable income on food. This figure, though, may be atypically low and stem from how the COVID-19 pandemic has affected some incomes. In fact, in 2019, the equivalent food budget figure was 9.6 percent.

9. Discretionary expenses

Your discretionary expenses encompass anything that doesn’t fall into the above categories. They comprise all your wants and none of your needs – think vacations, hobbies, social life, things of that sort.

The 50/30/20 rule suggests earmarking 30 percent of your income for discretionary expenses. Of course, this figure will fluctuate based on how much of your income goes into the other categories. If the above eight categories comprise 78 percent of your income, you’ll only have 22 percent left for discretionary spending. You shouldn’t scale back on other fronts to free up room in your discretionary budget – well, at least not at first. If you eventually figure out how to save money on the other categories, you can use those savings for discretionary spending.

How Else to Stick to Your Budget

With this guide, you should be ready to craft a $50k a year budget. That’s the easy part – sticking to that budget may be more challenging. It requires increasing either your income or your credit. On the latter front, credit cards are a great start, especially MoneyMash’s five best choices for your first credit card.

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