Budgeting for young adults

If you want to get your finances under control as a young adult, you need to find out where your money is coming from and where it is all going, and do this early.

Once you know where your money is going, you can then adjust how much you spend or save in different categories based on those numbers.

This is a budget.  A budget is simply an estimate of the places you make money, and all of the places you spend money. A budget is usually done monthly, but it’s also a good idea to make a yearly budget.

I know from personal experience that doing this faithfully can take effort, especially if you’re not used to it.  It can be an ongoing struggle, but without detailed information about where your money is going, you’re just guessing and leaving your financial future to chance.

Creating a Budget

To show the process of creating a budget, we will make a hypothetical budget for a young person who works full time, makes some money from investing, and makes a little bit of money every month from a blog they own.  Their expenses are just the basic day-to-day expenses for someone of this age group. So let’s get started.

1.  Begin by listing all of the places you make money. This would include your job, investments, and any other sources of income. Try to estimate how much you will make from each category:

Income
Estimated Amount
Work $3,000
Investments $400
Blog $50
Total $3,450

2.  Now, do the same with your expenses, again estimating how much each item will cost. Don’t list every individual item, just lump them into categories.  So the expenses section would look something like this:

Expense Estimated Amount
Savings $35
Rent $400
Food $200
Electric $50
Internet $50
Student Loan Payment $200
Renter’s Insurance $20
Eating Out $50
Miscellaneous $500
Total $1,505

Notice that the first item on the list is savings. I put that first because savings is the single most important item on the list.  You must get into the habit of paying yourself first. More on that later, but let’s move on with our budget.

3.  Once you have written down your estimates of how much everything will cost, it is time for a bit of simple math. Get out a calculator and add them all up to get total income and total expenses, as I have done in the tables above.

4.  Our example person has $3,450 in estimated income and $1,505 in estimated expenses. This leaves a surplus of $1,945.  The fact that the total estimated income and expenses don’t quite match is fine.  Next, we’ll make them match.

The question is what to do with that extra money. (And having extra money is great!)  This depends on your situation. Maybe you are saving for a new car. Perhaps you want a new computer. When I was younger, I saved for a rainy day.  But in this example, there are some student loans to pay off — not unusual — so we will put an extra $1,000 toward the loan payments, and the rest into savings.  After this, the expenses now look like this:

Expense Estimated Amount
Savings $980
Rent $400
Food $200
Electric $50
Internet $50
Student Loan Payment $1,200
Renter’s Insurance $20
Eating Out $50
Miscellaneous $500
Total $3,450

Notice the numbers in bold that have changed.

5.  Our budget is now balanced!  We have planned for all of our expenses, and even made some extra loan payments and put some extra cash into savings.

6.  Now, throughout the month, sit down once per week and write down the actual income and expenses in a new column.  So on the 14th of the month, our budget might look something like this:

Income Source Estimated Amount Actual Amount
Work $3,000 $1,478
Investments $400 $237
Blog $50 $31
Total $3,450 $1,746
Expense Estimated Amount Actual Amount
Savings $980 $300
Rent $400 $0
Food $200 $125
Electric $50 $50
Internet $50 $50
Student Loan Payment $1,200 $428
Renter’s Insurance $20 $0
Eating Out $50 $12
Miscellaneous $500 $248
Total $3,450 $1,213
BALANCE $0 $533

Notice that we have added a row on the bottom that shows the final balance. This was calculated by taking the total income minus total expenses. So our example student has made $1,746 so far this month, and spent $1,213, leaving him with $533.

As the month goes on, continue writing down all of your transactions.

7.  At the end of the month, review your budget to see the areas that were close to budget, and possibly those that were way off.  What did you learn?  How do you plan to adjust?  (Do you plan to adjust?)

This budget is a tool for you

Ultimately, what you decide to do with your budget is up to you.  How aggressively you save, how quickly you pay down your debt is up to you.  Also, on the “dark side,” how quickly you sabotage your future and dig yourself into a deep debt hole is up to you, too!  It’s rare that young people go into debt on purpose, but if you fail to budget and fail to heed warning signs that you’re spending more than you make, that’s exactly what will happen.

Budgeting as a young adult will pay off.  Your older self will thank you!

To summarize …

  • Budgeting should be done every month to keep track of your expenses.
  • Sit down once per week to go over your finances.
  • Pay yourself first (put money into savings).
  • Limit your spending to the amount set out in the budget, and if you don’t, get back on track or adjust some other areas!  Fast!
  • A budget is pointless if you don’t stick to it.