You’ve just graduated school, you’ve got a degree, a new job and you’re ready to take on “the real world.” Fast forward 6 months… you’ve moved out of your parent’s house, you’ve bought a new car and student loan payments are coming due. Bills are mounting and your paycheck is spent before it arrives.
Does this sound familiar? Believe it or not, 20-somethings all over the country are in the same situation. If actions are not taken to improve the situation, the problem only compounds further.
The good news is there is a simple and easy solution that allows you to take back control of your life… Budgeting!
Budgeting is the basic first step of personal finance used to build the foundation for financial success. There are different ways to approach budgeting. In my own experience, I have found that the “Zero-based Budget” works best.
Here are the steps you must take in order to start budgeting:
1. Review Your Finances
What are you spending your money on? Often times we really don’t now where our paycheck goes every month. Look at the last 6 months to identify where you spend your money
2. Identify Total Income
Figure out exactly where your income comes from. This could be from paychecks, birthday money, investments, etc.
3. Identify Your Expenditures
Where does your money go? Common payments go towards gas, rent, clothes, dining out, loans, groceries, etc. Examine each one and determine whether each expense is necessary (rent, loans, food) or discretionary (dining out). Reduce your discretionary expenses so you can start saving money NOW
4. Draft a Budget
Now that you know where your money goes, it is time to prepare a monthly budget. You need to estimate the total amount of income you expect for the following month and plan out all of your known and expected expenses so that they sum to zero. By knowing where your money is going, you will feel mentally relieved
Here is an example to illustrate the above steps:
You get paid twice a month, receiving a net check (after taxes) of $1,300 per pay period. Your expenditures are $1,000 rent, a $150 car payment, $250 student loan payment, $250 for groceries, $200 for gas, $150 for utilities and $100 for your cell phone. The top of your budget will be $2,600 ($1,300 x2) representing income and then you will subtract from that total all the expenditures.
When you do the math you have $2,600 of income and $2,100 of expenses. Leaving you with $500 of unallocated money… according to zero based budgeting you cannot have a balance left over at the end of the month, it has to be zero! So you HAVE to allocate the other $500. A 5,000 year old rule of thumb for money is to save 10% of every dollar you make. With that in mind we assign $260 to go to our savings account and $240 to go to Entertainment for the month. You can spend that $240 guilt free on whatever you want; a video game, going to the movies, a nice restaurant. It’s up to you!
When you add in the 2 new amounts to your budget you end up with $2,600 of income for the month less $2,600 of expenditures for a total of $0. What that means is that you now know where all of your money is going for the month. When that first paycheck comes in you can sit down and pay all your bills and know you’ve taken the first step towards financial success!
The most difficult part of budgeting is actually following it. It takes a lot of determination, but you will be very happy to know you can cover all your expenses.
Now that you know the secrets of budgeting, it’s time to get out there and take control of your life! Good luck!