Everyone eventually develops their own budgeting habits. This guide is meant to start you off with the basics.
The first step is recording and categorizing our monthly expenses. We need to know where our money is going each month. At the time of publishing, I am not sponsored by any of the services below.
If you are mainly a credit card user, I would recommend Mint. Mint’s interface isn’t amazing and there are a ton of ads, but it gets the job done.
If you mainly use cash or have concerns about budgeting apps selling your data, then I would recommend Excel with any app that doesn’t require a login. Personally, I collect receipts and record expenses in Monefy.
Below is an example of my monthly expenses:
Yes, I do enjoy eating out and I do not pay rent or have student debt due to the unique circumstances of living at home and a full scholarship. I am not a good representation for an average budget of a young professional.
Here is a budget of an average young professional living with 2 roommates in the outer boroughs of New York City:
Don’t worry if your expenses don’t look anything like mine or the average young professional. Remember, everyone’s life is different. Here are the excel sheets for creating your own pie charts. You are free to download them and use them for yourself.
Now that we have our monthly expenses, we can go ahead and see how much income we bring in each month. We can take all our paychecks for the month and add them up to see the total income. In this example, we will be using a $50,000 yearly salary in New York City. According to the Smartasset calculator, the monthly income after taxes will be: $3,094. The total expenses for the average young professional is New York City is $2,040.
$3,094 - $2,040 = $1,054
A simple equation: monthly income minus monthly expenses will tell us how much we can save each month. Once we have figured out these three key numbers, we can start building a three to six month emergency fund.
After our emergency fund, we can focus on investing for the minimum match in your company’s 401(k) and maxing out your IRA every year. We crunched some math in our Simple Guide to Retirement for Young Professionals for 401(k) and IRA. Here is a sneak preview below:
For a 5% match in the 401(k) on a $50,000 salary, we would need to contribute $208.33/monthly. Then to max out our yearly IRA, we would need to contribute $458.33/monthly. $1,054 is more than enough to save $666.66/monthly. In 43 years, we can potentially retire with:
Read more about the steps and calculations here. Now that we understand the impact of budgeting and saving our money for retirement, let’s get back to budgeting.
The three rules to a healthy budget:
1) Do not spend more than you have
2) Always leave leeway in your budget
3) Diligence is key, keep your budget under control
The first rule is obvious. If you spend more than you have then you are in debt. You don’t want to go deeper in debt every month as a working professional.
The second rule is what I call padding; we don’t always have the same expenses every month. Sometimes we spend more and sometimes we spend less. There should be a comfortable amount of breathing room between our expenses and income.
The third rule is the most important, we need to be aware of our budget every month and this takes time and work to put together, analyze, and take action. If we are spending too much then we may need to cut our expenses or find a higher paying job, whichever is more feasible. A budget should be reviewed every month.
We are ready to start saving for a better future!
Got a budgeting story worth sharing? I would love to hear it in the comments below. If you would like to request a specific topic you want to learn more about, please let me know in the comments section below or email me at email@example.com!
Cover Image Credit: Francesco Gallarotti
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