How to Budget Monthly – 5 Simple Budgeting Steps for Recent Grads
Your days as a poor college student are over. You’ve entered the workforce and collected a paycheck or two, and now you’re ready to spend it. However, you’ll soon realize how quickly that paycheck disappears if you don’t keep track of your spending habits. A personal budget plan allows you to monitor your expenses, plan for emergencies, and achieve future financial goals. Thankfully, you don’t need a finance degree or advanced spreadsheet skills to create a personal budget plan. This article provides the following five simple budgeting steps to help you get your finances in order:
- Determine your personal budget plan goals
- Track your discretionary and non-discretionary expenses
- Choose a personal budgeting worksheet or application
- Analyze your expenses
- Follow and re-evaluate your personal budget plan
1. Determine your personal budget plan goals
The word “budget” sounds like a dirty word to many young professionals who still enjoy Friday nights on the town or a pair of designer jeans. However, consider how the cost of these items adds up over time. For example, you’d save roughly $1000 a year if you cut just one $20 restaurant tab each week! That’s a considerable amount of money you could save for a vacation, retirement, student loan repayments, or a down payment on a home. So don’t view your monthly budget as a litany of sacrifices; instead, it’s a stepping stone towards bigger and better rewards.
Financial goals vary from person to person. Here are three basic goals that you can tweak based on your situation:
- Pay off credit cards, student loans, and any other debts – Pay off loans with high interest rates – such as credit cards – as quickly as possible. You’ll need to decide if it makes sense for you to pay off low-interest rate loans – such as subsidized student loans – or make minimum payments for the full term of the loan. It’s sometimes worthwhile to invest the money you could use to pay off low-interest rate loans and just pay the minimum amount due. In these cases, your investment – such as a mutual fund – should make you more than enough money to offset the greater amount of interest you’ll pay over the life of the student loan. Check out the selected resources to the right on this page – this is a big decision so try to read at least a few articles before deciding what’s best for your student loan situation.
- Save an emergency fund – Set aside the equivalent of three months of your living expenses in an emergency fund, which you can use to pay for unforeseen expenses like a broken leg or car repairs. True, a credit card would come in handy in these types of situations, but the resulting debt and additional interest rates could damage your credit score. An emergency fund helps prevent looming debt and, worse yet, debt collectors.
- Save for long-term goals and retirement – When your high-interest rate debts are paid off and your emergency savings are adequate, think about long-term investments. Long-term financial goals include saving for your first home, your wedding, a dream vacation, or retirement, to name a few.
2. Track your discretionary and non-discretionary expenses
Record your spending for two or three months to better understand where your money goes. If you’re the organized type who has managed to file away all of your bank statements, credit card bills, and receipts each month, then you’ve done the bulk of the work already! However, if you haven’t saved these items, now is a good time to start. Record all of your expenses in a notebook every day or two. Keep track of your bills, rent, and monthly income, but don’t include investment returns or projected salary bonuses in your monthly income amount.
Also consider any one-time expenses you had over the course of the year. Some examples include furniture, Christmas gifts, security deposits, or weekend trips. You can estimate the monthly cost of these one-time expenses by summing them and dividing the annual amount by twelve. Enter this as a monthly expense in your notebook.
As you record your spending, classify your discretionary and non-discretionary expenses by using two different colored pens or highlighters. Non-discretionary expenses generally cover necessities such as groceries, clothing, and shelter. They also include routine expenses such as taxes, utility bills, debt repayments, 401k contributions, ongoing health care expenses, transportation costs, and insurance payments. Discretionary expenses include non-essential extras such as vacations, entertainment, club memberships, cable, self care, take-out meals, or furniture.
3. Choose a personal budgeting worksheet or application
Perform a web search for “personal budgeting worksheet,” and you’ll find a plethora of templates that vary in detail. Choose one that’s easy to use and suits your particular expenses and budget goals. This simple budgeting worksheet from Microsoft Excel or Real Simple’s Worksheet for Figuring your Monthly Spending are good choices that divide expenses into just a few general categories. However, if you feel you need to take a closer look at very specific aspects of your spending, then a detailed personal budgeting worksheet might be right for you. Next, go through your notebook line by line and assign each expense to one of the categories within your preferred budgeting worksheet. Enter your total monthly expenses by category and your average gross monthly income (after estimated taxes) into the worksheet. Continue to highlight your discretionary and non-discretionary expenses if they aren’t already separated within the worksheet.
One other option is to use Mint.com's iPhone application, which has a ton of built in features that basically does your budget categorization for you!
4. Analyze your expenses
Next, you’ll analyze your personal budgeting worksheet to figure out your spending ratios, which are the proportions of your total income that you spend within various categories. Your debt ratio, which is the sum of all your monthly payments divided by your monthly income, should ideally be between 30 and 35 percent. These monthly payments include mortgage or rent, minimum credit card payments, car and student loans, and any other monthly debt payments. Consider seeking help from a credit counselor if your debt ratio is over 50 percent. Your savings ratio should be ten to fifteen percent of your total monthly income. Your non-rent, non-discretionary expenses, such as utility bills and groceries, and all of your discretionary expenses will comprise the remainder of your monthly income.
If you’re spending more than 90 percent of your total income, analyze your discretionary expenses in detail. You might notice that you’re spending a little too much on restaurant meals or lattes. Take another look at your notebook or iPhone budgeting app to identify some of the specific instances when you visited Starbucks ten times in one week or took a cab three times in one night. Look for excessive credit card charges where you’ve indulged a bit too much. Try to limit your credit card use to no more than 15 percent of your monthly gross income. Using it more than that is an ineffective way to balance your budget, especially when you factor in high interest rates you’ll incur when you don’t pay off your entire balance. Try to trim your discretionary expenses and credit card charges as much as you can.
Keep in mind that you can also trim a few non-discretionary expenses. For example, if you’re spending more than 30 percent of your gross income on rent, consider finding a roommate or a more reasonably priced apartment. You can also control your utility payments by using energy sources more efficiently, or you can save money on gas by taking public transportation once or twice a week.
Document which costs you decide to cut and which you plan to keep in your personal budgeting worksheet. This will serve as your guide for the next month or two.
5. Follow and re-evaluate your personal budget plan
Keeping a personal budget plan is a lot like maintaining an exercise program – it becomes easier the more you do it. Throughout the next month, try your best to add each transaction to your personal budgeting worksheet according to the expense allocations you entered in step four. Your attempts to track every single expense will seem daunting at first. However, don’t be too hard on yourself if you miss a receipt here and there.
Remember that your monthly budgets aren’t set in stone. Continuously re-evaluate your non-discretionary and discretionary expense allocations. It might not be realistic to save as much as you wanted to in one category, so you should update your budget accordingly. Also continue to look for ways to cut costs that you hadn’t considered before.
A weak personal budget plan may cause a chain of unfortunate financial circumstances including high credit card debt, unpaid bills, bounced checks, and a low credit score. These events affect your ability to rent, obtain a home or business loan, or even land the job of your dreams. Follow these simple budgeting steps, and you’ll reap financial rewards in the future.
By: Tanya Stanfield
8-26-2009
Tanya Rose Stanfield continues to navigate the post-college world in Chicago six years after graduating from the University of Wisconsin. She's a freelance writer and marketing communication expert who writes for athleticgals.com and keystoneclick.com.
