Making a budget can help anyone of any age reach their money goals. A budget does more than just push people to save money for things they want.
When you’re a teen or young adult, budgeting builds a habit that will help improve your financial health. Budgeting for young adults also helps them decide which financial goals are the most important and shows how to meet them more efficiently.
When it comes to money, teens and young adults don’t have as much duty as older people do. So, proper budgeting can help them get ahead towards a better financial future much faster.
Here are the most important steps of budgeting for young adults and how to implement them.
1. Figure Out Your Monthly Earnings
You can’t save money if you don’t know how much you make, so figure out your monthly income. This amount is essential to set up a budget.
Your sources of income may include your 9-to-5 job, a part-time job, an allowance for doing in-house chores, or even your income from a small business or side hustle.
2. Know Your Expenses
It’s important to include expenses in your budget—things like your car, gym membership, friends’ birthday gifts, a sudden visit to the mall, or an expensive candlelight dinner with your partner. Also, don’t forget paid services like Netflix or Spotify. You need to keep track of all of your expenses. This way, you know how much of your monthly income you can spend that fits your budget.
3. Track Your Expenses
Now that you know where your money is going, you can start budgeting. To do this, you can choose a few different methods. The most effective are keeping all your receipts and bank account statements, using an app to track payments, or creating a list of monthly expenses.
This can help you get a clear picture of your spending categories. The prime categories are rent, groceries, utilities, clothes, activities, and transportation. After getting a clear idea about the overall expenses of these categories, you can develop a working budget.
4. Plan Ahead
Once you know where you spend your money, make a financial plan to move forward. Financial planning means sorting and ranking all of your costs, not just cutting back on the unnecessary ones.
In your budget, you should list your income, fixed costs (such as monthly or recurring bills), probable future expenses, such as holidays, birthdays, and graduations, and financial goals.
Once you write down these goals and know your previous monthly spending pattern, you can determine what you need to change.
5. Pay Off Your Debts First
If you want to spend less and save more, it is important to pay off your debts first. This can eliminate future interest payments. For young adults or teenagers, this list typically includes student loans, car loans, and credit card debt payments.
There are two typical methods of paying off your debts based on priority. They are:
- The debt snowball method: Start with the smallest debt balance and pay it off first. Once you’ve done this, work your way up to the next smallest one. This method may help you pay off debts faster.
- The debt avalanche method: First, pay off the debt balance with the highest interest rate. Then, select the debts with the next highest interest rate. This method might take a while to eliminate your debts, but you’ll save on overall interest payments in the long run.
Whether you choose the avalanche or snowball method, keep making the minimum monthly payments on all of your debt accounts. Use any extra money you earn to pay off your top-priority debts.
6. Make Short and Long-term Goals
Young adults should set both short and long-term goals. This way, as a young individual, you can achieve your day-to-day financial targets and save money for big future goals.
For example, you can list a short-term goal to consolidate your credit card debts in six months and set up one long-term goal such as paying off your student loan within the next 5 years.
As your life changes, you may need to modify these financial goals according to your wants and needs.
7. Select a Suitable Budget Plan
What form of budget should you follow? Personally, I recommend three budgeting methods:
Zero-based budgeting: Popular with young individuals, zero-based budgeting uses every penny of your monthly income. In the next month, you’ll start with zero in hand. But this doesn’t mean you spend all your money on unnecessary items. Any surplus amount should go towards debt payments or your emergency fund.
For example, if you make $1000 a month, you’ll spend the entire $1000 as a monthly budget. After paying off all your expenses, if there is any surplus (suppose $200), that money should be “spent” on debt payments or savings.
50/30/20 budget: Under this plan, you divide your monthly income into 50% essentials, 30% wants, and 20% savings. For example, if you make $1000 a month, you’ll spend $500 on essentials, $300 on wants, and $200 on savings. By following this easy allocation, you can handle every household expense and save money without sacrificing your needs.
Envelope method: This is most effective for tracking your spending. Each expenditure category should have its own envelope, and you’ll have a set amount for every cost category. This way, you can track every dollar spent and avoid overspending.
For example, if your household budget for food per month is $500, take $500 out of your bank account and put it in your grocery envelope. Keep using that envelope money only to buy food or groceries; don’t pay for other expenses with it. If you have money left over in this envelope at the end of the month, add that amount to next month’s food budget.
8. Do Not Go Over Your Budget
It will be difficult to control the urge to buy when you’re young. But spending on something without thinking about your budget isn’t wise. You’ll reap the benefits of making a budget only if you stick to it long-term.
To begin with, you should set 3 principles:
- Spending money on needs always takes priority over wants
- Find ways to save money, no matter the amount
- Never go over your budget; cut back somewhere else or wait until you can afford it
Following your budget lets you buy the most important things first. It also teaches you discipline and self-control. The skills young people learn from budgeting will help them achieve financial independence for the rest of their lives.
9. Automate Savings
Automating savings can also help you with budgeting. Once you get your paycheck, automatically transfer a set amount into your savings or emergency fund. You won’t have the chance to spend it this way, and you won’t forget to do it.
10. Set Up an Emergency Fund
Sometimes, we need additional money to manage living expenses during a sudden crisis. You can build an emergency fund through your budget to ease the financial pressure during a job loss, health hazard, car repair, or other financial emergencies. The average emergency fund should cover 3-6 months of living expenses.
11. Focus on Retirement Savings
After paying off debt, a young adult should plan for retirement. The sooner you start saving, the more interest you can make. As a teenager, start with a tax-advantaged plan like a 401(k). If you are employed and your employer matches your retirement contribution, aim to save 15% of your gross income, including your employer’s match.
Why is gaining an employer match vital while saving for retirement? The reasons are:
- It is free money
- It has tax benefits
- It has the benefits of compound interest
You never have a second chance to capture compound interest. Every $1,000 you don’t save in your 20s might cost you $20,000 in retirement.
Trust your financial skills and fund a Roth IRA after receiving the company’s match. After reaching the IRA contribution limit, max out your 401(k).
12. Practice Self-Control
Creating a budget is tough–and it is far more difficult to stick to. You need proper focus and determination to avoid any kind of spending urges. As a young adult, you can’t improve your financial situation without maintaining your budget plan.
Always think about your budget before making a purchase. If you can’t afford an item, stop yourself from using credit cards. Wait until you get sufficient cash in the coming month. This way, you can delay your shopping urge and avoid overspending.
13. Use Budgeting Apps and Templates
The Internet is full of helpful budgeting tools and resources, including information on choosing the best bank accounts, budget templates, budget apps, and calculators. Some can connect directly with your bank account, automating much of the process, while others require you to enter your financial details.
You can also read online blogs from popular financial experts to grow your financial knowledge as much as possible.
14. Get Help From Professionals
If you find it difficult to maintain a budget and struggle with debt, consider consulting a financial advisor. Although your finances aren’t as complex as an older adult’s, you don’t want to fall off track, especially not this early on. A financial advisor can get you started in the right direction, setting you up for a prosperous future.
Start Saving While You’re Young
The most important thing about money management is saving it. The less you spend, the more you’ll have.
Saving money takes dedication over a long time. Budgeting is just a plan to ensure you don’t spend all your money on things you don’t need and still have money left over to save and invest. The effort you put in now will pay off in the future.
Stop Wasting Your Money
Between paying bills, buying groceries, and saving for retirement, we could also use a little more money each month. One of the simplest ways to free up a little room in our budgets is to stop wasting money on things we don’t actually need.
Side Hustles Ideas for Couples
One of your main goals as a couple should be to manage your money. Whether you have a joint account or separate accounts, making money together can help you improve your finances. Imagine the possibilities of creating a side business as a couple – one that generates extra income and brings you two closer together.
Lyle David Solomon
Lyle Solomon has extensive legal experience, in-depth knowledge, and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998 and currently works for theOak View Law Groupin California as a principal attorney.
