Budgeting for Twenty-Somethings

Working with monthly figures makes budget calculations easy, but not all payments are made monthly. Locate the regular net income on your check stub. That’s the money left after taxes and other withholding. Don’t count overtime pay as income for budgeting since it isn’t a reliable income source. If your paychecks are weekly, multiply your net income by four for an estimated monthly income. If your check arrives every two weeks or twice a month, multiply by two. If you’re a contract worker, the business that issues your check doesn’t withhold payroll taxes. Plan to set aside about 25 percent of your monthly income for taxes if you freelance or operate your own business.

Look at last month’s bills to create a list of what you owe every month. Rent, utilities, car payments, credit cards and student loans are common expenses that are due monthly. You probably have bills that are due quarterly or yearly as well, such as car insurance, renter’s or homeowner’s insurance, and life insurance. If you have payments that aren’t made monthly, add them to your expenses by figuring the total for the year and dividing by 12. The total of your monthly expenses is the amount of income you need each month to pay all of your bills.

In addition to your regular monthly expenses, you need to calculate your incidental costs, like coffee or meals out. Tracking your spending can help you locate the leaks so you can make changes and redirect your money to your priorities. Write down all of your purchases for one month or save all of your receipts so you can see where your money goes. If you pay with a debit card, download your banking information to budgeting software that categorizes purchases. Compare your expenses with some after-tax guidelines such as those recommended by Forbes. Housing should be 25 to 35 percent of your net income, with utilities another 7 percent. Transportation might be as high as 15 percent, food should be about 15 percent and personal care, including clothing, is usually about 10 percent. Your entertainment expense should be 5 percent or less, but many young people overspend in this category.

If your income exceeds your monthly spending, you’re on track to good money management. You’ll be able to pay more than the minimum each month on your credit card bills or student loans and accrue an emergency fund. Start a savings account for your emergency fund and use it to stash away your overtime pay and any other extra money. Aim for three to six months of living expenses.

If your monthly expenses and spending exceed your income, you need to reduce your spending fast. Here’s where the commitment comes in. You have to want to make it work for you. Cut back on unnecessary items and upgraded services. Ask your employer for more hours or find a second job to boost your income. Once you get a grip on your budget, you can go back to more leisure time.

Everything you own costs money to maintain. For example, a car is more than just a car payment; you have to insure it, fill it with fuel and keep it in good repair. You may pay storage fees or need a larger house for your accumulated stuff. Evaluate the total cost of items before you make a purchase and again if you get in a financial squeeze. Sell items that cost more than they’re worth to you. It’s good money management and allows you to pay for items you really want.