Budgeting can be difficult, especially for young adults. When I started becoming independent, I had zero knowledge about budgeting and money in general. This made me vulnerable, I believed a lot of money myth just because they were said by people who I deemed to be smart.
Another reason to start budgeting as soon as you can is to develop good habits and set yourself up for success. There is nothing worse than waking up at age 40 to realise you are drowning in debts. Luckily, starting a budget is easier than you may think and you can even start today.
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Budgeting for young adults
What is a budget?
A budget is a short-term financial plan for your income and expenses. While the explanation may sound daunting, essentially this only means listing your incomes and allocate money to the different expenses you may have.
How to make a budget
To start making your budget, first, you need to know how much you earn. each month. You may know this already, if not take a look at your payslip or bank account. You will need the after-tax income, meaning the amount of money you take home.
If you have any additional income, this should also be added to the income section of your budget. Examples include part-time jobs, side hustles, or interest.
If you are a student, you may not currently have an income and live from your parents’ support or student loan. However, this does not mean you should not make a budget! In fact, budgets are especially important for people who have an irregular monthly income such as student loan which is commonly paid on a termly basis.
With a student loan, each payment usually covers four months. Therefore, you can calculate your monthly income by dividing the sum of your payment by four. If you are on a different payment schedule, simply apply the same concept.
If you are paid weekly or bi-weekly, you have to use a multiplier to get your monthly income. You can use 4.5 if you get paid weekly and 2.5 if you are paid bi-weekly. You are using these decimal numbers because no month has exactly four weeks (mind February though).
Once you know your income, you can look at how much you are spending or plan to spend. There are a few different scenarios that may apply to you:
- You are already independent and know what you spend
- You are already independent but do not know your spending
- Or you are planning to become independent and want to be prepared
Assuming you do not know your spending, the first step is to look at your bank statements and figure out your outgoings. If you do not fancy sitting down, you can simply track your expenses for a month and see what you spend.
Once you know what you spend, make a list of all your expenses. For example:
- Rent: £500
- Groceries: £100
- Eating out: £50
- Alcohol: £30
Some of the expenses you will find will likely be fixed, meaning you cannot change them, for example, your rent. Others are more under your control such as eating out. To make a budget, first, add your fixed expenses.
You can then subtract this money from your income and see how much money you have left. This leftover money can then be used for savings and non-fixed costs. It may be that you are happy with your current spending level, or you may want to sit down and think about which categories you can cut down on.
Guideline for expenses
To find out whether you should be spending more or less on each individual expense, it can be useful to look at guidelines. These also help you if you have not moved out from your parents’ place and want to make a budget for the future.
The 50/20/30 is a popular budgeting strategy which recommends you spend 50% of your available money on things you need such as rent and food. A further 30% should be allocated to your personal expenses which include things like travelling and eating out. Lastly, the final 20% should be saved.
However, this is merely a guide. In reality, you may find that you spend less on essentials and more on personal spending. This is okay as long as you allocate sufficient money to your savings. If you struggle to save money, you can download my free interactive workbook.
To get your free copy, simply pop your email address into the form below. You will then receive a password which will open the doors to Monethalia’s VIP area from where you can download the workbook.
What to do with your savings
Now that you are able to save money, you may wonder what to do with it. The saving goals of young adults differ from people of older ages. You may want to:
- save for a house deposit
- prepare to start a family
- save to go to university or do a training course
- spent money on travelling, perhaps for even for a year
- take a gap year and explore various schemes e.g. au pair, teaching English abroad etc.
Even if nothing like this is on your mind right now, your situation may change. This is why your savings are generally best placed in premium bonds, high-interest savings accounts, or instant-access savers. Wherever you choose to place it, just ensure you are getting a good interest rate.
Of course, investing is also an option. However, you should only do this if you are sure that you will not need the money for at least five to ten years.
Budgeting for young adults summary
Budgeting for young adults can be a challenge but it does not have to be. When you are young it is the best time to sit down and plan your finances. This will set you up for a successful future and establish good money habits.
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