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Setting up a budget that will lead to financial independence
You’ve managed to navigate the world of academia safely, and are now, officially, ready to fly the coop. Leaving the confines of a dorm room or your parents’ house is an exciting prospect, but before you know it you run into a problem that plagues millions of young Americans every year—how to pay for the freedom that is afforded to freshly-minted adults. Whether you are simply in the planning stages of moving out, or you have navigated an empty fridge and car emergencies for a few months already, you can make living on your own a lot easier by figuring out how to set a budget.
Step One: Figure out your Goals
Financial advisors and experts suggest that anyone planning to live on their own or currently in the process of navigating their young adulthood sit down and examine their financial goals. Whether your goal is to buy a property, live debt free or have extra money to travel the world, you’ll need to factor your goals into your budget. If you would like to travel extensively, you’ll need to learn how to set a budget to accommodate such expenses. If you are planning to live debt free, you’ll need to set a budget that allows for you to pay down existing debt and allows you to avoid the use of credit cards. If you have a short-term goal of owning property, keeping your credit score high and your savings high will be your primary goal.
Step Two: Be Honest About What You Can Afford
Living accommodations will take the biggest chunk of your net income each month. Most advisors suggest spending no more than 30% of your net income on rent or mortgage payments. If for example, your take home pay is $2,000 per month, your living accommodations should cost no more than $600 per month. Those who make $3,000 per month, can spend as much as $900 per month.
Financial experts note the second biggest expense is a vehicle and vehicle maintenance, followed by incidental bills such as student loan debt and credit card debt. Your bills should take up no more than 50% of your take home income. If you are spending more than half of your take-home pay on bills, you need to reassess your budget and consider making some changes.
Step Three: How to Set a Budget for Savings
Aside from contributing to a 401k, you should set 20% of your take home budget to savings. You can segment these savings however you see fit; whether you want to invest some, or simply leave your cash in the bank to accrue interest. Experts suggest, however, that every young adult craft short-term and long-term goals for their savings, and set aside money for an emergency fund. Emergency funds are for unexpected life events; whether that is your car needing major repairs or your pet getting ill.
According to recent data, only 37% of Americans can pay for an unexpected expense between $500-$1000 with cash. When you are just starting out, your first goal should be to fund an emergency account. After an emergency account is funded, you can move on to long-term savings goals.
Whether you are just figuring out how to set a budget, or you’ve been working diligently to meet your goals, it is always a good idea to sit down and reassess your current situation. The more you know about your money and where you spend it, the better off you’ll be.
