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Popular financial blog The Simple Dollar featured a post today targeted towards recent grads entering the working world for the first time. The post recommends something called the 50% Solution - essentially putting 50% of every paycheck in your checking account to cover day-to-day expenses and 50% into a high yield savings account, and not touching it. Then, once you’ve settled into a routine, every three months invest 80% of your savings account balance in an index fund. The author, Trent, goes on to explain:

Putting half of your paycheck away buys you a little more than a year of complete freedom for every year that you work. If you work for ten years, then you’ve probably built up eleven or twelve years of living expenses. Even if you work a single year, you’ll be able to just follow your muse for another year on that savings.

But is it really that simple? Or even that plausible? Quite simply, I know I couldn’t do it. Believe me, I would love to be able to put half of each of my paychecks away in a savings account (and someday soon I’d like to be able to). But if I were to do that now, while I’d be investing in my future, sure, I would be hurting my present by not focusing on paying down my debt — from credit cards, student loans, the car I needed to buy after graduation because my job required it, etc. — first. 50% of each paycheck on an entry-level salary is nearly impossible, in my opinion.

I think the best advice to come out of Trent’s post is that putting money into a savings account (especially one with a high interest return) with every paycheck is a huge advantage. I personally put $25 (much less than 50% of my paycheck, yes, but as much as I can handle) directly into a savings account each time I get paid. I look at it like I’m paying another bill, so there can be no exceptions, and I don’t touch that money for any reason. And as I pay down my high interest debts mentioned above, I will up that deposit amount.

The biggest thing to keep in mind is to pay down the debt first but still put away (or invest) as much as you can. If 50% is too much to handle, start where you can and work your way up, even if it’s just $25/month. Set your sights too high too quickly and you’ll doom yourself to failure and falling further behind in debt.

source: “About To Enter The Workplace For The First Time? Try The 50% Solution” [The Simple Dollar]

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