The transition to adulthood comes with a number of important milestones. One of the most stressful is financial independence. Once you become a financial contributor to your household, or even move into your own home, it’s time to start getting your financial life in order. One of the most important things you’ll need to do is create a budget.
Why do I need a budget?
A budget is essential because it lets you do a number of things:
- See how much money is coming in
- See where your money is going
- Commit to changing your spending habits
Knowing how much money you have coming in is easy when you are just starting out. As your income diversifies, from things like interest from savings accounts, it will become harder to keep track of. It’s important to know exactly how much money you have coming in so you can know if you are over-spending.
Seeing where your money is going is critical because you can’t effectively make decisions about your money if you have no idea how much you are spending where. Tracking where your money goes can be as easy as putting your expenses into an excel spreadsheet each month.
The most useful part of having a budget is that it allows you to make changes to your life. Once you know how much money you have coming in and where it goes, you can change it. This allows you to set and accomplish goals. For example, if you want to take a trip to Europe, once you know how much it will cost, you can figure that into your budget.
Let’s say you can save for it in a year by finding another $100 a month in your budget. A great way to do that is to eat out less. It may hurt to stay in eating a grilled cheese when what you really wanted was some tacos from the place down the street, but knowing that you are saving money for a purpose will help ease the pain.
Now that you have a budget, you can start forging the financial life you want. But what should that look like?
What should my budget look like?
The exact form of a budget will vary, not only person to person but also over the lifetime of a single person. This is because money is usually tight when you are young. You may not be earning much and have student loans to repay. As you get older, your debts go down and your income goes up. As a general rule you can expect your budget to look something like:
- 50% Necessities – This includes things like rent, which shouldn’t be more than 30% of your total budget, utilities, groceries, etc.
- 30% Lifestyle – This includes, eating out, hobbies, things that you would be likely be able to stop spending money on in a financial emergency.
- 20% Savings/Debt Reduction – This includes things like student loan payments and retirement, or even emergency funds.
How can I make changes to my budget to achieve my financial goals?
Once you’ve written your budget and at least started moving it towards the percentages recommended above, you can start thinking about using your budget as a tool to achieve your financial goals. And this is as simple as committing to that change and then following through. Though that can be more difficult than it sounds. People use a number of different strategies to create follow through. One of the most common ones is sometimes called the all-cash diet.
It’s about what it sounds like. Rather than paying for things directly out of your bank account, you pay cash as much as possible. After you’ve paid all your utilities, rent, etc. you withdraw all the money you’ve budgeted for day-to-day expenses that month, or that two weeks, and that’s all the money you get. Depending on your particular circumstances, it might be easier to divide the money into different envelops, one for each week, rather than keeping it all together. Studies have shown that the all-cash diet has a number of benefits:
- Helps cut spending – By holding your money and seeing it leave your hand, you have a more concrete understanding of where your money is going. Additionally, if you only have five dollars at the end of the week to go out, you’re only going to spend five dollars.
- Reduction of fraud and errors – Cash prevents things like accidental double charges and credit card number theft.
- Reducing Overdrafts – Because you can’t spend cash that you don’t have. If you are only spending what’s in your wallet, you’ll never be at risk of accidentally spending more than you have.
- Streamlined Store Returns – If you do decide you don’t need something after all, it’s easier to exchange things you paid cash for. Often, if you want to do a return with a credit card you’ll need to produce the credit card you used for the purchase.
How can I find money in my budget for investing?
There are a number of ways you can find money for investing. You can use one of the above methods to shift your budget priorities around. Alternatively, there are apps you can find that will do things like, round up your debit purchases to the next dollar and deposit that money into an investing account. The most effective way to determine what is best for you is to do some research, pick a method, and give it a try. If you decide you don’t like it, you aren’t committed; you can switch to something else. And you can keep switching until you find a method that works for you.
Becoming financially independent doesn’t have to be a stressful process. There are a number of things you can do to make life easier. One of the most important is to make a budget. Once you have a budget, you can start manipulating it to reach your financial goals.