Welcome to First Things First! This series will help you prepare for a range of life changes. Think of each installment as an instruction guide that will either give you time to locate a safe landing spot or help you hit the ground running. Each article will contain a handy checklist you can reference so you can remain calm, cool, and in control of whatever life hands you.
Setting up and Sticking to Your First Budget
The good thing about adulting with your first real job is you get to control how you spend your money. The downside? You have to control how you spend your money because you have to paying real bills. And since there’s a whole world of really cool things to do and stuff to go with it and you have credit cards – that means you need to take charge of your spending before it gets out of control.
Setting a budget for yourself is easy. Sticking to your budget to save money for the future can be maddeningly hard. Doing both well is both science and art, and we’re going to show you how to do it.
This starts with you listing ALL of your expenses, from the biggest to the smallest. List exactly what you really (and we mean REALLY) need for your well-being. Some expenses will be fixed amounts – such as housing expenses, loan payments, insurance premiums, communications – while others will have vary to some degree or another (food, utilities, credit card, transportation costs).
To get started, we recommend using a budget spreadsheet to categorize your expenses. There are several free templates available online, including the Personal Budget, Household Budget Worksheet, Family Budget Planner, and Personal Monthly Budget.
At minimum, your list of expenses should include:
- Energy: electricity and/or natural gas
- Food (regular groceries only)
- Water and Sewer
- Vehicle Insurance
- Property Insurance
- Health Insurance
- Transportation Costs: public and personal vehicle costs
- Debt: credit card, student loans, mortgage, car loans, legal obligations, etc.
- Communication: television, Internet, telephone, etc.
- Entertainment: movies, dining out, concerts, etc.
2) Did I Really Spend THAT Much?
AKA – Track your spending. This sounds hard, but electronic banking makes it very easy, especially if you created that budget spreadsheet in Step 1. If you withdraw cash for daily expenses, write the amounts and reasons down in a journal.
The goal is to control your spending so you can save money. Savings should be used to first build an emergency fund. Afterwards, reward yourself with something that you want. Wash, rinse, repeat.
3) Plan Your Budget for One Year
Specifically, this means finding ways to reduce the expenses you logged in Steps 1 & 2. It’s not always about giving up extra pizza, tickets to the game, or a cute pair of shoes. There’s big savings to be found around the home, too.
- Stick to a definite price range/percentage for housing. CPI data benchmarks one third (33.33 %) of your income as a good theoretical figure for housing costs, but the real world shows you can expect to pay up to 50% — especially renters.
- Find the best energy plan for your home. The average monthly electric bill in Texas is 1,174 kWh with a cost of $133.33. Chances are good you can get a better deal by signing up with the right retail electricity provider.
- Take charge of your energy usage. Even simple energy efficiency reduces your energy costs! Change the air filter on the furnace/air conditioner every three months (or more often, depending upon your HVAC system). Replace all the incandescent bulbs with LED bulbs. Kill the energy vampires with smart power strips. Turn things off when you leave a room for more than than 20 minutes.
- Take control of your water usage. You pay the utility for every drop that comes into your home and for its use of the sewer when it leaves. Fix leaky faucets and toilet valves and find ways to reduce water used for flushing the toilet. Stop buying bottled water. Nearly 25% of all bottled water is really just tap water with a fancy label. If you want filtered water, buy an inexpensive water filtering pitcher to keep in your fridge to refill a water bottle.
- Buy a car you can afford to pay for and afford to drive. You might be able to afford to buy a nice ride, but gas, insurance, maintenance, and parking costs from the daily commute all add up quickly. Walking, biking, or using public transportation whenever possible can reduce these expenses significantly. By biking or walking, you’ll get exercise that benefits your cardiovascular system and increases oxygenated blood-flow into your brain — which improves knowledge retention. You’ll also waste less time twiddling your thumbs in traffic and hunting for parking. Depending on where you live, the average annual cost for relying on biking and/or public transportation is $200, compared to over $8,000 for an average car.
- Take control of your credit card debt. The average American aged 18 to 65) owes $4,717 in credit card debt. With an average credit card interest rate at 15%, it will take a decade of minimum payments to pay off that debt. Here’s the killer: total payments add up $22,869. Not only does credit card debt drag your savings, it lowers your credit score and reduces your access to better loan terms. Limit the number of cards you carry and always pay more than the minimum amount until the debt is fully paid.
4) Look for Ways to Increase Your Income.
Apart from investments, do you have any interests or hobbies that you can build into a side business? Think about it — you could be making money while having a whole lotta fun!
We also recommend looking for opportunities for raises and promotions at your current job or looking for a new job entirely. Sometimes, the best way to increase the size of your budget is to simply make more money.
5) Set Clear Savings Goals
It’s important you create goals for your budget, but make sure they’re reasonable, appropriate, and relevant to your situation. A good first goal? Work up to having 6 months’ worth of expenses stored in your savings account. Doing so provides a bit of financial security in case of sudden unemployment, medical emergencies, and other unforeseen situations.
We also recommend you checking out our “Building a Better Budget” series for additional tips for improving your budget situation throughout your life.
Next Up in the First Things First series: Renting Your First Apartment