or many twenty somethings, handling money (and handling it responsibly) is oftentimes viewed as the most adult task. This also makes it the most intimidating. However, it doesn’t have to be. It is natural to feel overwhelmed about taxes, loans, and the like when you don’t have experience dealing with them. So, it only makes sense to start by handling what you can control.
In terms of money, the easiest thing to control is a budget. And no, not the kind of budget that justifies your frugal spending. But rather the kind of budget takes into account rent, groceries, taxes, and other adult things.
Here are the most important steps in creating your first adult budget:
- Understanding Your Monthly Income
- Logistics of Making a Budget
- Ways to Ensure You Stick to Your Budget
Understanding Your Monthly Income
Your monthly income is the basis for your budget, so it only makes sense to start here.
The easiest kind of budget to make is based off of your monthly income. It’s easier to use your monthly income as a basis since you owe most things, like rent, monthly. Though, this budget can also be adjusted to account for being paid weekly or bi-weekly.
The first thing you need to understand is what your gross monthly income is. Your gross monthly income is the amount of money that you earn each month, before anything is taken out for taxes, social security, etc.
Opposite to your gross monthly income, you also have what may be referred to as your adjusted gross income, or AGI. You may also see this be called your net income. Your adjusted gross monthly income accounts for your taxes, social security, and the like being taken out of your paycheck. Your AGI will always be less than your gross income. This is the amount of money that you will actually have access to and the number that you will utilize to create your monthly budget.
It should also be noted that if you are self-employed or taxes are not taken directly out of your paycheck, you should set aside more than enough money to cover what you will owe for taxes. Oftentimes there is also a self-employment tax that you should account for on top of your federal and income taxes.
With a firm grip on understanding what you are working with for your monthly income, you can confidently start making your budget.
Logistics of Making a Budget
Now that you have a grip on your monthly income, it’s time to break it down to make sense of what’s reasonable when formulating how you plan to budget.
Now that you have an idea as to how much money you are working with per month, it’s time to actually start formulating your budget. And remember to use your adjusted gross income, and not your gross income, for figuring out specific figures for each category!
The first thing you want to do is make a list of goals that you want to accomplish for your budget. Chances are if you found your way here, you already have a few reasons as to why you wanted to make a budget in the first place. Maybe you want to limit frivolous spending, figure out how much is appropriate for rent, or set money aside for the future? Unsure of what goals you want to accomplish? Check out our article on 4 Finance Goals For Your 20s!
With your goals now in mind, it’s time to break down the logistics of formulating a budget, as many professionals recommend. To start, it is recommended to spend around 30% of your adjusted gross income on housing. For example, if your monthly income - after taxes - is $1,000, it is recommended you only spend $300 per month on rent.
However, housing is a flexible budget category. If living in a nice apartment or area is important to you, it is suggested you can spend up to 40% of your adjusted gross income on housing. You can also only spend 20% on your housing if you live in a relatively inexpensive area, or don’t feel the need to spend as much money on your rent. With that said, 30% is the sweet spot.
The other category with a recommended amount to set aside is your savings. It is recommended to set aside at least 10% of any money you earn for your savings. It is best to set this money aside in a savings account that you won’t be able to easily access. So, no, you shouldn’t keep all your money in your checking account in an effort to trust yourself that you’ll save 10% of it. Plus, in a savings account it will earn interest, giving you more money than you started with! Of course, you can always set more than 10% aside for your savings. Just be sure you are setting at least 10% aside!
It is also a good idea to think about how much you want to spend on certain categories. For example, food. This may be easier to think about in terms of an actual amount of money rather than a percent of your income. For example, say you want to limit your food spending to $200 per month, or $50 per week. And be sure to include take out costs with your overall food bill!
With the main spending categories out of the way, it is time to get into more specific spending. The easiest place to start here is to list out all of the monthly expenses you have. This will include expenses such as rent, car insurance, your credit card bill, etc. Note that things like utilities or your internet bill may not be incorporated into your rent, and you should list these separately. However, this list should also include expenses such as your Netflix subscription, your gym membership, and anything else along those lines.
With these expenses listed out, see if you are in the recommended range for the amount you should be spending on rent, including utilities and other expenses that may not be included in your direct rent payment. Check to see if your subscriptions exceed the amount you would like to stick to for entertainment. This list will help you gauge if the amounts you set aside for yourself are realistic or need to be adjusted.
Of course, you can also utilize an online budget tracking tool that will help you set up, as well as maintain your budget with minimal stress and effort on your part. There are several online budget trackers that are free!
Ways to Ensure You Stick to Your Budget
Tips for beyond the budget itself, helping you hold yourself accountable.
So, you have your budget. Now how do you stick to it? There are no sure fire ways to make sure you stick to your budget each and every month, but there are some ways to hold yourself accountable.
One area that many young adults and college students seem to struggle is with budgeting for food. Particularly, they struggle with eating out more often than their budget likely allows. However, there are several ways to keep yourself from eating out, and thus sticking to your budget. The first is to set a limit as to how many times you can eat out per week. If you eat out almost everyday, it probably wouldn’t be realistic to limit it to once. So, gradually ease into it.
If simply setting a limit as to how many times you can eat out isn’t enough for you, it could help to invest in a set of tupperware. Tupperware isn’t the cheapest investment, but if you do invest in it, it will likely be good for a while. By investing in it, you will feel guilty if you aren’t using it, so it can keep you from eating out at work.
However, if one issue you have is not knowing how to cook or what to cook, look up quick and easy recipes and make a list of the ingredients to buy when grocery shopping. By having the ingredients, you don’t have an excuse to not make the food. Having a list will also keep you from buying food that you don’t need when grocery shopping.
Also, don’t be afraid to ask your friends and family to hold you accountable! This can be as simple as checking in at the end of every month simply asking if you stuck to your budget.
With your budget made and ways to hold yourself accountable, know that is may not be perfect your first time around. Thankfully, budgets aren't permanent, and you can tweak it as you see fit month to month. Don't let one little setback discourage you from continuing to set goals and budget like an adult!