As a recent college graduate I am really excited about starting my professional career. Now I have to be responsible about my spending habits and start planning for our future (my fiancé and I). Despite being a finance major I have to admit that personal finance didn’t cross my mind until my senior year of college when I took Introduction to Federal Taxation and Investment Analysis. So I decided to invest some time researching about effective financial planning practices for budgeting and saving. After reading a Goldman Sachs article about millennials spending habits, I found out almost 18% of 30 year olds live with their parents, this percentage keeps increasing. Which means that it is harder to save for a house now than it was 30 years ago. I am a millennial and I have two long-term goals, managing my own investments and buying real estate in California. While your goals might be similar or different from mine you might benefit from reading. I decided to write an article with some tips and helpful hints that have helped me create effective budgeting and saving practices.
If you just graduated from college and are starting your first full-time job like I am, and even if you aren’t, one of the first things you need to do is create a budget. Creating a budget sounds like an easy thing to do, I often hear my friends say I know where all my money goes to: gas, rent, utilities, etc. While it is good to know your expenses that does not mean you have budget.
How do you create a budget?
Start by identifying your regular monthly income, this might take a couple of months. If you had a signing bonus that you’ll receive within your first few paychecks but you won’t get every month, or you are still setting up your 401k contributions, or you moved to a different state and are unsure about tax obligations. From previous experience a $50,000 paying job meant that you are only taking home around $40,000. Every month you take home $800 less than you think you do.
Once you’ve identified your monthly net income, identify regular monthly expenses like: gas, utilities, rent, groceries. These expenses are hard to cut back on. Some financial advisors have certain percentages to keep in mind to have a healthy financial life, although I believe that everyone’s situation is different these percentages are a good way to benchmark your spending. 50-30-20 is usually what financial advisors recommend. 50% of your net income should be spent on regular monthly expenses. Gas, utilities, and rent fall under this category. The following 30% goes to debt repayment if you have student loans. Again, these percentages and budget information are meant for recent college graduates. I would not recommend committing 30% of your net income towards a car payment, if you don’t have student loans then debt repayment should be 20%, and savings 30%. The last 20% should be savings. One of the first things you have to do when you graduate from college is to build a safety net of cash. Advisors recommend around 6 months worth of salary, to prepare for life unexpected events. If you have to pay a visit to the ER, your car breaks down it is better to have some cash build up in your savings account, specially when you have just graduated from college and probably do not have a long credit history. Out of the 50% that goes to your regular monthly expenses, monthly rent shouldn’t account for more than 30% of your net income. Using the same analogy from earlier someone making 50k in income and around 40k in net income should spend around $1,000 on rent every month.
Adhering to a budget might be hard for the first couple of months; it is recommended that you make modifications as necessary within the first few months. I hope you find this helpful and use it as a starting point towards a healthy financial life.
For more information on creating a budget check out these articles and websites:
- http://time.com/money/3892561/new-college-graduates-money-student-loan-410k-emergency-fund/
- https://www.forbes.com/sites/nextavenue/2013/05/29/11-essential-money-tips-for-new-college-grads/3/#6f518c6b6ad4
- https://www.smartaboutmoney.org/
- https://bettermoneyhabits.bankofamerica.com/en/saving-budgeting/creating-a-budget
If you are moving to a new city or finally moving out from your parent’s house check out this video on the real cost of living!
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