Adulting 101: Budgeting

By Maggie Wilson on August, 8 2019
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Maggie Wilson

Budgeting does not have to be difficult and stressful, it can be fun and incredibly rewarding and you may end up having more money than you ever thought possible. 

Finding the perfect platform can make the entire experience simple and fun. While Excel is a tried and true place to create a budget, new apps have revolutionized the way you can budget.

Find Your Platform

Mint is one of the best known and most reliable budgeting apps. You can link your credit cards and debit cards to Mint and it categorizes your expenses for you. You Need A Budget is great for Type A personalities, it forces you to allocate every dollar to a purpose. Wally is another great option for apps to give you general overviews and keep you from overspending. Find what app or software works best for you and stick with it to make your budgeting experience fun and rewarding!

Total Income

The first step to determining any budget is figuring out how much money you are actually making. The salary you are given from work or the hourly rate you are being paid is not the amount of money you will bring home. Gross pay is the money you make before taxes and other deductions have been taken out. Net pay is the money you will actually take home. Determine what your average net pay will be every month to base your budget off of for the year.

Expected and Actual Expenses

 A key to keeping any budget accurate is firstly determining your expected expenses and then comparing your actual expenses. Your expenses can include rent, or a mortgage payment, utilities, internet, auto insurance, health insurance, debt, phone, food, transportation, entertainment, savings, and charity. To start your budget determine your average monthly expenses. Many of your expenses may be set monthly, such as rent and debt payments so you probably have a good idea what these will cost you every month. For expenses that can vary every month, use an average so that you can allocate the proper amount to your budget. If this is your first time living on your own, many apartments or previous owners will provide an average monthly expense for utilities and other variable expenses.

Now that you have created a great tool, you have to put it into practice and track your actual spending. Maybe you made a made a great budget, but it is not helping anyone it you do not follow it. Once a week sit down and go over your actual expenses and see if you are meeting your expected budget. This will keep you accountable and keep you on your budget!

Two Ways to Budget

Deciding which strategy you utilize for your budget is the best way to get started after you understand your income and expenses. Two of the most common strategies of budgeting are the 50/30/20 plan and zero based budgeting.

The 50/30/20 plan, popularized by Senator Elizabeth Warren, takes your income after taxes divides it among three different sections, needs, wants, and savings. Limit your need based spending to 50% of your after tax income. Keep in mind what needs truly are, electricity, food, shelter, and water are all things you need to survive. Only allow for these expenses to use 50% of your income, though. To keep yourself on this budget, live in an apartment or a home that you can afford and will fit in this budget with all your other necessary expenses. Your wants will comprise 30% of your budget, and keep in mind that you have a very strict definition of need, so wants may include more than you think. Shopping at the mall, having multiple streaming services, and entertainment expenses are all wrapped into the want category. The last 20% of your budget goes toward saving and debt repaying.

Zero based budgeting is a very simple concept, all your money is allocated and your after tax income minus your budget equals zero. This does not mean you have zero money in your bank account, far from it! This means that all of your money has a purpose. If you have subtracted your expenses from your budget and you have $100 left over, you don’t! Reallocate that money to a section of your budget. This will help you utilize your money in the proper places and you want waste any money.

Sinking Funds

Very popular for holidays and vacations, a sinking fund is used by taking the total amount of money you want to spend, say $1,000, and the amount of time you have to save for it, say 12 months, and putting that much money away each month to reach your goal. Sinking funds can be put into a separate savings accounts which helps to differentiate your money and the savings do not blend together. These funds are a great way to save with a purpose and see the progress toward your goal, a trip to Bali or the perfect gift may be a lot closer than you ever thought possible. 

Down Payment Savings

Creating a budget for your future as a homeowner is a necessity. Buying a home is not something you should go into on a whim. Most of your current living costs will follow you to your new home, but some will change or eliminated altogether. The house you’re moving into is likely larger than your apartment, but it may be closer to work. Your utilities will be higher, but your transportation costs may be lower. You may be able to negotiate a cheaper price for Internet as well if you move to a different area.

Practicing for homeownership costs is a great idea. If you decide to budget for an extra $500 a month to put towards your mortgage, start putting it in a special savings account now. Then, when you’re financially ready to purchase a home, you’ll have a nice stash to put towards a down payment. A down payment can be between 0%-20% of the home’s price. You may also be responsible for closing costs which are typically 6% of the price. Start saving for these costs now so that you can enjoy your new home from the start.

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Have Fun

While budgeting may seem tedious and not at all fun, it can be one of the most rewarding experiences. You get to watch your own finances grow and progress every month to become more stable and become closer to reaching your goals. But, if you decide to see a movie with friends instead of putting money in your savings account this month, don’t fret! You’re young, and it’s okay to treat yourself occasionally. Keeping a realistic budget includes giving yourself some fun money. The first step towards a sound financial life is making a solid budget that you can keep.