Budgeting could be your ticket to financial success. Here's how to get started.
Many people first start working full-time in their 20s, and that's also the period of life when they start becoming fully responsible for their own bills. But when you're new to personal finances and having to manage your money, the process can be intimidating. That's where a budget comes in.
Following a budget will make it easier for you to see where your money goes every month. And by sticking to one, you'll set yourself up to:
- Grow your savings
- Avoid debt
- Work toward major goals, like buying a home
Here's your step-by-step guide for setting up a budget in your 20s -- and taking control of your finances early on.
Step 1: Assess your income
Maybe you get paid weekly, every two weeks, or once a month. Either way, figure out what your total monthly take-home pay looks like after taxes and other deductions. That's the amount you'll be using to guide your spending.
Step 2: List your recurring expenses
There are certain expenses you encounter every month, like your rent, car payment, and cell phone bill. Comb through your credit card and bank account statements to see not only which bills those are, but how much they cost on average for those bills that aren't fixed.
Your rent payment, for example, may be the same every month, but your grocery bills might vary. Therefore, take a look at the past three months of bank statements and credit card bills. If you spent $400, $450, and $500 on groceries in those three months, then put $450 as your monthly grocery allowance since it represents an average of what you might spend.
Step 3: List your one-off expenses
There are those bills you pay monthly, and then there are those that may only come up once a quarter or once a year. Some people, for example, pay their auto insurance company annually since paying that premium as a lump sum can result in some savings. Search your bank and credit card statements from the past year to make sure you're accounting for all of those one-off costs, and then incorporate them into your budget.
Say you normally spend $1,200 a year on car insurance, only you make that payment every June. In that case, you'd actually factor in $100 every month for auto insurance.
Step 4: Create a line item for savings
Ideally, you should be saving some amount of money every month. When you're in your 20s and are first starting out in the workforce, that sum may be minimal, and over time, it might grow. But no matter how small the amount is to start, make savings an official line item in your budget so it stays on your radar.
What your budget might look like
Now that you know how to set up a budget, here's an example of what one might look like:
- Rent -- $1,200
- Utilities -- $100
- Cable -- $150
- Cellphone -- $100
- Groceries -- $450
- Healthcare -- $400
- Car insurance -- $100
- Car payment -- $250
- Gas/commuting to work -- $200
- Pet supplies and care -- $150
- Entertainment -- $300
- Clothing -- $100
- Gifts and charity -- $100
- Savings -- $200
If you take home $3,800 a month from your earnings (or more), you're all set.
Having a budget is an important part of spending wisely and taking control of your finances from an early age. Follow these steps to create your first budget, and remember to adjust it as your income and expenses change over time. It's also a good idea to review your budget every few months and make sure it's working for you. Making adjustments as necessary could help you stick to that budget and avoid landing in debt, as so many people do.
Alert: highest cash back card we've seen now has 0% intro APR until nearly 2025
If you're using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR for 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee.
In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2023 The Ascent. All rights reserved.