I was recently asked by a friend who is in her senior year of college for advice on budgeting for life. Like many of us who are in our early 20s, it can be hard to find a balance between the money we need for things like rent or food & the money we want to use for fun. Budgeting is the first step to finding that balance.
The most basic thing anyone needs to know about budgeting is the simple difference between income vs. expenses & how those two affect what kind of money you’ll have. Always follow this basic formula:
income – expenses = gain/loss
The idea is simple. If you make more than you spend, you’ll have money left over. If you spend more than you make, you’ll be losing money.
Although this sounds simple, things begin to get a lot trickier when you put this practice into reality. If you’re young & want to take better care of your finances, here are the steps I’ve used to make a killer personal budget that will set you up for decades of success.
Step 1: Determine how much money you make each month
Either on a piece of paper or your computer (I prefer using Excel), write down how much money you make in a given month. Make sure to be accurate about wages, which is as easy as looking at your paycheck. If you’re like me & make some of your income in tips, track those tips for at least one month & then find out what your average tip earnings are. Use this average as an estimation for monthly tips earnings.
You now have an accurate picture of your monthly income.
Step 2: Determine how much money you need to spend each month
On that same document, write down how much you need to spend in a given month on various expenses that will always recur.
The keyword here is need, meaning that you should only be including things that are essential for your survival. This includes things like food, rent/utilities, gas, car payments & insurance. Similar to tips, you may need to find an average for some of these expenses (i.e. food) while others will always be a set price.
You now have an accurate picture of your fixed expenses. At this point, take your income & subtract your expenses from it to see whether or not you have money left over.
Note: If you are losing money here, you will need to immediately make tough choices about how to cut back on these expenses (i.e. cutting back utility usage, smarter shopping at the grocery store, changing jobs for better pay, getting another roommate). Some of these choices will be hard, but the reality is that you can’t live comfortably if your basic expenses are wiping out your bank account.
Step 3: Set aside a certain percentage of your money towards savings
If you have money left over, determine a set percentage of your income that will be put away for savings. A lot of experts recommend putting 20% of your monthly income away for savings; however, this percentage can be higher or lower dependable on what you make. Regardless, it is better to start putting some money away than no money at all.
Step 4: The money left over can be used however you want
After taking money out for basic expenses & savings, the money left over is what you should be using for fun, personal expenses. This includes things like memberships/subscriptions, nights out with friends & shopping for luxury items rather than survival ones.
Doing this will put into perspective how much you really have to spend on things you enjoy. I personally know how easy it is to fall into the trap of buying things that you want & failing to realize that you aren’t even able to take care of the things that you need. Live within your means.
Step 5: Review & update frequently
Your budget will always be changing based on what’s happening in your life. Make sure update your budget whenever necessary based on changes in your income & expenses.
Why does any of this matter?
Whether we like it or not, money is the foundation of our society. It has been proven time & time again that your grasp on money will greatly determine the type of life you’ll live.
Having a personal budget is one of the most important things you can to do to secure the best life for yourself. Failing to do so will have the opposite effect. According to U.S. Bank, 59% of Americans don’t use a budget to track their finances. How can you possibly move through life without a firm grasp on your own money?
I used to be in the statistic of Americans who don’t budget their money & I was miserable doing so. Not only was I not able to do the things I wanted, but the financial stress associated with the poor management of my own money was too much to deal with. However, budgeting has been one of the greatest tools I’ve used to get my life back on track & live my best life everyday. I know it’ll do the same for you too!
What did you take away from this article? Was this article helpful? Would you like to learn more about budgeting or personal finances? Comment below & let me know what you think!