Managing your money is always important. For new graduates making the move from classroom to workplace it’s an essential skill.
The three main priorities of financial adulthood are paying down debt, building up emergency savings, and saving for retirement. (For more on this, see the Bowen Report “Personal Finance Tips for College Graduates”: https://bowenasset.com/personal-finance-tips-for-college-graduates/) An important part of becoming a financially responsible adult is keeping track of how much of your money is going in and how much is going out. Budgeting is a firm foundation for reaching your financial goals.
A personal or household budget is an itemized summary of expected income and expenses for a defined period of time, typically one month. While the word budget is often associated with restricted spending, a personal budget should really just mean more efficient spending. An effective budget will show you how much money you expect to bring in against all of your expenditures, from required expenses such as mortgage payments or rent, to discretionary spending such as entertainment, concert tickets, vacations, electronics, and restaurant meals. A good budget can help keep your spending on track and even uncover some hidden cash-flow problems that might free up even more money to put toward your other financial goals.
Here are some sample budgets:
80/20 Budget
The 80/20 budget simply advocates committing 20% of your income to savings and 80% to everything else. A general rule of thumb in most budgeting plans involves putting at least 20% of your income towards savings. With this plan, there is little, if any, expense tracking. With this or any budget, it is advisable to have the “savings” automatically removed from your paycheck or your checking account.
50/30/20 Budget
The 50/30/20 approach is one of the most popular budgeting strategies. It recommends that 50% (maximum) should go towards necessities, while 30% goes towards discretionary items and 20% goes to savings. This budget is based on your take-home income, which is your income after taxes, health insurance premiums, and other expenses that are taken out of your paycheck. The 50% directed toward necessities is for items such as housing, electricity, gasoline, groceries, etc. Note: It’s important with this budget to strictly differentiate what you want from what you need.
Five Category Budget
How to separate want from need? Try the five-category budget, which breaks down spending in this way:
Housing. This should comprise 35% of your take-home income. That includes the mortgage or rent, all home repairs and maintenance, property taxes, utilities such as electricity, gas, water, and sewer, and homeowner’s or renter’s insurance. In short, it includes every housing-related expense.
Transportation. This should take up no more than 15% of your take-home income. That includes auto-loan payments, gasoline, car insurance, all repairs and maintenance, the amount you pay for parking, or—if you ride public transportation, or use taxis or ride-sharing services—the amount that you pay for tickets or fares. Remember, transportation isn’t just your car payment. It includes everything: your auto-loan payment, insurance and inspection fees, and maintenance on your car such as oil changes, tune-ups, a new radiator, and timing belt.
Other living expenses. These are predominantly discretionary expenses and should take up no more than 25% of your income. This includes eating at restaurants, buying concert tickets, buying new clothes, going to sporting events, and taking a trip on vacation.
Savings. You should devote 10% of your budget to putting money away. It’s never too soon to be looking toward retirement with a 401(k) or IRA, but first you should build up an emergency fund. A good guideline is to always have three months of living expenses put away to deal with the unexpected, such as a job loss or serious illness or accident.
You might be thinking: Wait a second, why are you advocating a savings rate of only 10%? Don’t the 80/20 budget and the 50/30/20 budget both advocate savings rates of 20%? Yes, they do, but as you’ll notice under the 80/20 budget and the 50/30/20 budget, “savings” includes paying down debt.
Debt payments. These should total 15% of your income. Payments include credit cards or student loans. Note: This does not include your mortgage payment or car payment, which are listed under “housing” and “transportation,” but it does include any extra payments you’re making toward your mortgage and car loan above and beyond the minimum.
In this five-category budget, your savings and debt are listed as two separate categories. With 10% for one and 15% for the other, you are actually spending 25% (in total) on a combination of savings and debt pay-down.
Budgeting Apps:
Mint: This is one of the oldest and best-known budgeting apps. It was created by Intuit, the company that created QuickBooks and TurboTax. Mint can sync to your bank account as well as tie into your credit card account, brokerage account, and other lending institutions. Not only is budget-building seamless and easy, but Mint also helps guide your day-to-day spending by automatically categorizing your expenditures, alerting you to unusual spending, and helping you reduce fees you may incur.
PocketGuard: This app links to all your financial accounts and helps you track your spending compared to your budget throughout the month. PocketGuard is one of the easiest apps to set up and does an excellent job of tracking your income, savings, and bills throughout the month. PocketGuard also analyzes your bills and looks for ways you could potentially save and find better deals on things you pay for monthly, such as your phone bill, cable services, and internet service.
YNAB: (a.k.a. “You Need A Budget”) This app takes a different approach. Each dollar of your income is given a job, such as bill-paying, saving, or investing. By accounting for every dollar each month, it helps you cut down on overspending. By keeping it simple, YNAB helps you avoid the stress and pain of building a full-blown budget. In addition, YNAB also helps you plan for unexpected or infrequent expenses. It helps you get ahead so you’re not living paycheck to paycheck while also teaching you to be resilient if you’re hit with an unexpected overage.
Wally: This app helps you track your income and expenses, and it offers a snapshot of your remaining budget to help you avoid overspending. While Wally is basic in its offerings, it does a good job of tracking your income, expenses, and your remaining discretionary income. Wally also offers alerts when your bills are due, when you reach certain milestones such as a savings goal, or any other activity you want to keep track of. This app is free to use and has both an iPhone and Android version.
Goodbudget: This app is very good for couples looking to manage their finances together and is also useful for single consumers as well. It uses a traditional envelope approach to budgeting but on a digital platform. The app provides complete visibility across all platforms and devices in real time so both parties can see where all the money is and where it’s going. It also has some specialty features that help couples learn to save for big-ticket items such as cars and vacations.
Conclusion
Saving is as important as budgeting. We will have a later Bowen Report devoted to methods of saving and how paying down debt is an integral part of any savings plan. It’s important to consult with a financial adviser to help with any questions and before making any investments.
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