I’m actually super excited about today’s post because this is a topic that I personally was so confused about.
My biggest problem that I came across that led me to writing this post is that all the articles I read about budgeting were beyond vague. “save for retirement!” “pay yourself first!” “don’t spend too much on rent!”
What should I save for retirement? How much do I pay myself first? What is my ideal rent? Should cable really cost this much?
None of the posts I was reading seemed to answer any of these questions.
Where was the budgeting advice for the clueless college grad?
How am I supposed to be expected to go from digging quarters out of my center console to pay for happy hour to suddenly being paid tens of thousands of dollars?
Well everyone, here is that guide.
Step 1: How to Create a Budget When You Have No Clue What You Are Doing
The very first step in creating a successful budget is determining your goals.
If you’re creating a plan with no goals in mind, you will never stick to it. You should always have some sort of target or goal to help you stick with it!
Here are some examples:
- Save up for your emergency fund
- Save enough for a house down payment in 3 years
- Pay off credit card debt
- Begin making smart investment decisions
Make these goals specific for you! It won’t help if they are goals that are not important to you.
Try to have at least 3 goals. If you really want to challenge yourself, try to include a short term, medium term, and long term goal.
Step 2: How Much Money are You Really Making?
If you’re anything like me (and most people?), you can’t really wait until you start getting your paychecks to figure out your income.
I recommend using this calculator to help calculate what your paychecks will look like! This will help calculate what your net pay is – the amount you take home after taxes.
Make sure to fill out the info on the left side that shows your zip code and pay frequency!
Step 3: 50/20/30 Framework
For the absolutely clueless about budgeting, following a framework is probably a good place to start.
You don’t want to just start throwing your money into different pockets all willy nilly and hope things are great!!
There are many different frameworks or guides that people choose to follow when creating their financial plans, but I find the most simple to be the 50/30/20 framework.
However, I just call it the 50/20/30 framework because I choose to talk about the categories out of order lol.
Following a framework is great because not only does it provide a guide for you to start with, but it also can help hold you accountable!
Step 4: Calculating Your Largest Expenses or Necessities
So there are some things that you clearly cannot just “cut out” of your financial plan if you are trying to save money.
These are your necessities, which generally include housing, food, utilities, insurance, and anything else that is an absolute need and a fixed cost each month.
Starting off with rent…. How much can you afford?
I’ve read all sorts of different calculations and numbers, and I was honestly confused as heck.
However, you can use a rent affordability calculator to figure out your ideal rent cost.
Make sure you are inputting your NET income into this calculator, which is the number you calculated in the very first calculator above! This is the amount you bring home AFTER taxes.
In addition, it is always better to be on the lower end of the numbers.
Although this may say you can afford X amount as your maximum or ideal number, going below these numbers to be on the safe side will not hurt you.
I am fortunate enough to not have student loans, so this is something that I don’t really understand and don’t really have to worry about a lot.
However, student loan payments can be hefty! Make sure you are considering this when figuring out your financial plan.
To help you, here are some really good resources I found about student loans.
Should You Pay Off Your Student Loans Early? (The answer to this might surprise you!! Definitely give it a read if you have student loans)
To calculate how much you will expect to spend on groceries, track your spending for 2 months prior!
It is really tough for us to determine how much we are really spending when we don’t keep track.
Unless your utility payments are fixed into your rent, then this might just be a guess!
However, I would estimate for the higher end just in case and you can adjust later.
Employee Benefits and Other Insurance
It may be hard to figure out exactly how much you are spending on all of your benefits (health insurance, life insurance, voluntary benefits, etc.) before you start your job, but your employer may provide you with your benefit options and costs prior to your start date! This will help you estimate your costs.
Keep in mind these potential costs:
- Health Insurance
- Car Insurance
- Renters or Homeowners Insurance
How much should I be spending overall in this category?
Many experts recommend that your “essentials” make up 50% of your financial plan.
So, take your total net income and multiply by .5 to see what your maximum for this category should be!
Step 5: Calculating Savings
Most budgets will cover the “wants” category next, but there’s no way I can do that so we’re talking about savings next.
Have you ever heard people talk about paying yourself first? That’s what this category is all about.
You should ALWAYS pay yourself first.
This means setting aside the money from this category automatically, before you even get your check!
The reasoning behind this is that by taking this money out first towards things like retirement savings, emergency fund, your HSA, etc. you are making these goals a priority.
Many people will save these things for last and find that they don’t have enough money to put towards them as they planned.
Because we are human.
If given the choice between putting $200 into your retirement account and not accessing it for another 50 years and buying a new pair of heels to wear this weekend….?
Not hard to figure out which one most will pick.
If you put this money aside automatically, you will adjust the rest of your financial plan around these items. Not the other way around!
I know that it doesn’t seem important now, but it really is.
Consider this example:
Two people save the exact same amount per month ($500) at the exact same interest rate (8%).
However, Beth starts saving at 22 years old. Kristen starts saving at 32 years old.
They both retire when they are 65.
Beth accumulates $2,255,844 by the time she turns 65, while Kristen only accumulates $972,542.
That is a HUGE difference.
Start saving early. The end.
Remember in my post “Employee Benefits Fundamentals” when we calculated the maximum contribution to your 401(k)? MAX OUT YOUR 401(k)!!! It is FREE RETIREMENT MONEY FROM YOUR EMPLOYER.
Tips to help pay yourself first!
If you are starting to understand why paying yourself first is so important, there are a number of ways you can do so.
Apps like Qapital make it super easy to pay yourself first. This app is super cool!
It allows you to set up personalized “rules” to set aside money based on whatever criteria you choose.
You might tell it to round up each purchase under $5 and save the change to an account for vacation, or to just set aside 15% of your paycheck into an account for your emergency fund.
I recommend checking it out to help automate your saving!
The last big thing I want to talk about in regards to savings is an emergency fund.
You absolutely need to start saving for an emergency fund.
The standard rule is 3-6 months expenses for your emergency fund.
Once you calculate your monthly expenses, multiply by 3 months to calculate your short term emergency fund and by 6 months for your long term emergency fund.
For example: if your monthly expenses are $2,500, then your short term emergency fund should be (2,500*3) = $7,500 and your long term emergency fund should be ($2,500*6) = $15,000
Having an emergency fund is SO IMPORTANT.
You may think that you will never need it, but better safe than sorry.
These funds can be used for short term situations where you need cash immediately (car repairs, house repairs, emergency vet bills) or long term to pay expenses if you lose your job or are unable to work.
Make sure you are contributing to your emergency fund every single month! How much depends on your leftover income, which I will discuss below.
How much should I be spending overall in this category?
Experts recommend that the “savings” category should be worth 20% of your financial plan.
That’s really up to you! If you are able to cut down expenses in other areas, I would definitely recommend putting it towards savings and upping this percentage.
Step 6: Calculating Wants
The last category is what you might assume is the fun one!
However, in my opinion it is kind of misleading.
This category is not just a free for all to go on endless vacations and start fronting the bill for happy hour.
I would more accurately label this category “I wouldn’t die without it, but still really important stuff.”
What types of things does this include?
- Your subscription services (Hulu, Netflix, Spotify, etc.)
- Top tier phone plan
- Getting your hair colored
- Gym membership
- Daily Starbucks purchases
You get the idea, right?
These are all things that many of us want and find important, but they aren’t necessarily vital to our survival.
If you are having trouble with your spending in this category, try asking yourself how these items bring value to your life.
If going to the gym helps you relieve stress and improves your mood, you shouldn’t cut that out. The same goes for if getting your hair colored makes you feel confident or if listening to podcasts on your commute home makes it bearable.
However, if you haven’t logged into Hulu in 2 months, consider cutting it from your expenses.
In addition, make sure you are keeping in mind expenses within this category for different times of the year!
The holidays are a huge spending time, and you don’t want to end up in debt once December rolls around.
You can plan for these expenses all year round by setting aside money here and there for those “extra expenses” that may not occur monthly.
How much should I be spending overall in this category?
Experts recommend this category should be no more than 30% of your financial plan.
So, take your total net income and multiply by .3 to see what your maximum for this category should be!
Putting it all together
Let’s recap! To start off, you need to determine what your financial goals are. This is a crucial first step and super important to making sure you stay on track.
Next, you need to calculate how much you are actually making each month. This is easy if you already have paystubs, but you can still estimate if you don’t!
Now is where you need to go through each category and calculate your projected spending for every expense.
If you realize you are spending way more than you are earning, that’s a big problem! Figure out where you can cut some expenses.
STAYING ON TRACK
The very last point I want to address is actually the one that is my own achilles heel…. keeping up with your financial plan.
There’s no point in doing all these calculations and all this work just to look at the stupid spreadsheet one time.
You are setting yourself up for failure if you do this!
I will admit I am notoriously bad at tracking my expenses.
However, breaking this habit is SO important to becoming financially responsible (and successful).
Here’s my challenge for you: pick a day EVERY MONTH where you will sit down and make sure you tracked ALL of your expenses from the previous month. See where you are spending too much and may not realize it. Make sure you are staying on track with your plan! Adjust where needed to meet your goals. Put this day in your calendar and set a reminder to occur each month to hold yourself accountable.
I’ll be challenging myself to do this right alongside all of you!
I hope you found this series to be helpful!
Let me know in the comments below what are some expenses that you could cut from your monthly spending? (I need to cancel my Hand & Stone membership because I don’t go enough).