What am I supposed to do with my salary?
<div class="user-question">Hi Frich team! I’m 26 years old and recently got a promotion & now I’m making $120k / year. I feel like before this milestone I was barely getting by and spent my days trying to keep my head above water. I’ve heard so much about lifestyle creep and I’m scared that I will fall back into the same old habits & I never want to be back feeling like I’m barely getting by. I’m ready to level up & start feeling like I have control over my money. $120k feels like so much money but it’s crazy how quickly it disappears, so my question is: what should I be doing with my salary??? Just fyi - I’m single, don’t have kids, and I live in NYC!</div>
Hi and congratulations! That's a huge milestone 👏
Here’s something I have always found helpful when trying to figure out the “How” behind “How to Save Money.” For starters, there are plenty of ways to break down your paycheck - the easiest way being - Needs, Savings, and then “The Rest of The Stuff I Want But Don’t Need.”
After reading your question, I asked what advice I would have given myself when I was first starting out… and then I remembered someone once built a chart very similar to this one, and shared it with me. This chart depicts how your paycheck could (should?) be allocated as your income grows. I like to think of it as where the average household allocates based on increasing levels of income. (Of course, keeping in mind that everyone’s situation is unique, and your cost of living will cause major fluctuations to this chart.)
How to break down your $120k
In this scenario, I would generally structure your income using the 50-30-20 method so that it keeps you from going over budget. 50% of your income should be dedicated to Needs, 30% of your income should go towards Wants, and 20% should go into some form of Savings.
Because a lot of people ask for more specifics, here’s what I’ll add: It’s worth listing what you will include in your personal Needs, Wants, and Savings every time you get a promotion. It will change over time as you make more money, and your perspective on what (and how much!) goes into each bucket will evolve with you. For example, maxing out my 401k was a *need* for me, so I put a portion of my emergency savings contribution into my “Needs” and the remaining portion into my “Wants” bucket in order to max out my 401k when I first started working. Now, I have both my 401k max and my emergency savings in my Needs bucket, since I have the income to cover both.
Breaking down the phases of the chart, the first portion of your paycheck prior to putting much money into retirement is what I would label “Stabilizing.” Many if not most individuals making up to ~$50k with ~$0 in savings in the U.S. are covering their bills and saving the bare minimum (if that).
Once your income grows a few promotions later and you’re coming up to the ~$100k mark in salary *and* you have at least $100k in savings and investments, you’re approaching the phase that I’d call “Wealth Building.” During this time, you’re learning about different aspects of savings, investing, and retirement by having the financial means to put money towards them in significant amounts. At this point, you also have a decent savings for those rainy days (or perhaps a short summer in Europe while you pivot career paths).
Finally, at the point that you’re making ~$250,000 per year in your household *and* you have at least $500k between savings and investments, you’re approaching “Wealth Preservation.” You’re less likely to job hop, your income stream is consistent and capable of weathering most high cost-of-living areas (as of today), and you can safely maneuver most investment vehicles… even if you don’t always go low risk.
A few pointers about this chart that I want to highlight:
💰 When the chart indicates paying down high- and moderate-interest rate debt, it is particularly important to consider your personal circumstances, and how your relationship with money tends to work. The decision to pay down debt is very circumstantial, and likely worth a post in itself.
💰 This framework is meant to help you as a guide, not a firm set of rules. This is the best path in the U.S. for the average person. Don’t feel obligated to follow through anything you don’t think fits what you want to do personally.
💰Success is not completing this chart! Success is getting to a point in your life where you sleep well at night because you aren’t stressed about money. The goal of this chart is to help you stress less by understanding the average behaviors.
Here are the tools I'd suggest to set yourself up for success:
💰PocketSmith - for tracking your budget and seeing if you fall into the 50-30-20 guidelines
💰Ditch - for managing all your debt in one place & paying it off faster
💰Dovly - for building your credit score (which will get you lower interest rates for future big purchases)
💰Splash - for student loan refinancing
💰ZYNLO - for building your emergency fund while earning interest on it
Btw - here's how others are doing👀
When you think about your future, how do you feel?
💸27% Excited, but worried about money
😟21% Mostly worried
👏23% I’m sure I’ll figure everything out
🫂29% I feel confident financially, but worried about other things
I hope you enjoyed this chart and always welcome more questions. Find me online and let’s chat!
Saira Rahman
VP, New Investor Initiatives - Fundrise
