The first challenge I faced as an adult happened early in the adulting development. It was something I expected would happen to me eventually, and unfortunately I did not give it the due diligence and respect it deserved in the beginning. Had I done so I may not be facing the specific challenges that I happen to be facing now. It is a strange phenomenon. As children we hear about this adult concern, we understand to a point its importance, and how the simplest oversight to its demands could potentially ruin an adults life. Our parents spoke about it amongst themselves and referenced to it when we wanted them to buy us something they were not prepared to buy us. I suppose most of us as children suspected we would never make the same mistake our parents did, we would always have more than enough wealth, and never become victims to The Budget. However, one of the rudest awakenings we face as a young adult is that no one is immune; and no matter how much or how little you have a budget is vital to the success of any adult.
So, how does one get started on utilizing the most essential tool of any adult? This isn’t exactly taught in school, and most people assume your parents will teach you how it works. Sometimes they do, for others help is a little harder to come by.
I am grateful to my mother, who saw me struggle with my finances before I realized I was, and sat me down with a well-meaning and passionate lecture on how I need to be more responsible with money. I will not pretend to be a good little saint of a child and say I immediately took her words to heart. I listened to her speech and emphatic teachings and sat with her as we mapped out my income and expenses. I endured her love and concern with much eye-rolling and “*sigh* I know what I am doing!”. Thankfully, I was able to recognize her wisdom (eventually) and am now able to create and manage my own budget without oversight (Seriously, mom, I’m ok now. You can stop worrying).
I would like to share this knowledge with the rest of you with a simple example of how to create your own budget. Fortunately there are multiply ways to create and track a budget. If you prefer to write your important information down you can keep a journal or binder. You can create awesome spreadsheets to print or save on your computer. There are also dozens of useful apps out there to help you track your expenses and keep them on your person for immediate reference. The app that I have been using for years is Home Budget with Sync on Apple.
Let us start with the purpose of a budget. A budget is a tool to understand your income and expenses. With a budget you can see how much cash flow you have coming in and control where that cash flow is flowing to. If you know you make enough money to pay for all of your essentials, but wonder why you are constantly struggling with overspending or tracking where all your funds disappear to, then a budget is right for you.
To get started, you first need to know exactly how much income you have and where that income is coming from. This is simple enough if you have a recent pay stub to calculate your annual wages. Take your hourly rate and multiply it by the hours you work per pay period.
This equates to your Gross Pay. Next you will need to calculate your Net or “Take Home” Pay. In order to do this you will need to subtract from your Gross Pay your Pre-Tax and Tax deductions.
Before we continue, let me explain what these are. Your Pre-Tax deductions are portions of your wages that are removed before taxes which are then allocated to your elective benefits (if you have them). This can be your 401(k) contributions, your healthcare benefits, and contributions to an Health Savings Account (HSA) or a Flexible Spending Account (FSA).
Most companies will provide you with your deduction amounts, especially for health benefits and in the amount that you can expect them to withdraw per pay period. For a retirement accounts you may have to calculate that separately based on your contribution percentage. However, this is easy enough to calculate. You simply take the percentage and multiply it by the total gross per pay period. Below is an example of these calculations.
Once you have the amount of your Pre-Tax deductions total you will subtract this from your Gross Pay. Then, you will multiply this number by your Tax deduction. Tax deductions can vary greatly depending on how many exemptions you can claim. The math here is a little more complicated, however the general rule is that a single tax payer without dependents will be taxed as high as 19.8%.
If you would like to calculate your own personal Tax deduction you can review your most recent pay stubs to obtain the average percentage. Simply add the amounts removed from your income for Federal tax, State tax, and program taxes like Social Security, Medicare, OASDI, FICA, etc. Multiply this amount by 100, then divide by your pay stubs gross pay. This will give you the percentage of Tax deductions. It is best to do this with multiple pay stubs if you are on an hourly rate as your wages per pay period can vary.
Next you will take that percentage amount and multiply it by the total you calculated after Pre-Tax deductions. Then you will divide this number by 100 to obtain the total Tax deduction per pay period. Subtract his amount from the total you obtained after Pre-Tax deductions. What you will have remaining is your Net or “Take Home” Pay.
Still with me there? I know. This information can get a little dry and hard to process at times. Don’t worry, it took me a couple of tries to get it right too.
As you can see for the purpose of planning a budget it is better to base it off of your Net Pay rather than your gross pay as your Net pay could greatly differ. Once you have calculated your Net Pay, it is time to do the, er, more difficult work.
To understand the importance of a budget you will need to write a list of all your expenses. This includes your fixed and variable expenses. What are these you ask? A fixed expense is something that you know will be the same amount month to month. These can be a car loan payment, rent, pre-set amount you want to add to a savings account, or monthly subscriptions like to Netflix or Hulu. Variable expenses are expenses that can change from month to month depending on how much, or if at all, you plan to spend. These can be expenses for food at groceries or restaurants, a cell phone bill, utility bills, gas use, or payments to credit cards (beware of the credit card bill).
On a piece of paper, write down the description and amount of each of your expenses. For variable expenses write the top dollar amount you have spent in the past per month. Once you are done listing these expenses, tally the total amount.
You will then be able to see if you are living within your means or if you are overspending your budget. Write down the deficit amount next to your expense total. If you are living within your means then you can count yourself done and save your budget somewhere you can always refer to it at a later time, if need be.
But, lets be honest. If you are here looking at this page then you are like the millions of other young adults who have been living outside their means and need to get on top of their finances.
If you are a normal young adult then you will end up with a deficit spending amount. This is only the beginning of this painful process. However, don’t panic. You are not alone. We are all in this together. Take a deep breath (or many) and steady yourself for the next task. I am sorry, but this next part is going to hurt. Your are now going to need to decide if what you are spending your money on is for a Want or a Need.
We have all heard this phrasing in one place or another, “Want or Need”. Whether we want to admit it or not we as a society are used to our egocentric way of living. We don’t mean to be this way, however with everything we could ever want or ask for basically at our finger tips and the media, friends, self-help gurus, etc. telling us to “treat yo’ self!”, we are used to doing just that. Whether it is overpriced coffees, trendy top of the line clothes, or buying the latest technological device, we see it, we wants it, we has to have it (my Precious!). Unfortunately, this leads us down the rabbit hole of over spending and running into burdensome debt. The Budget is your best line of defense against this malevolence.
To make this work for you, you will need to examine your list of expenses and determine if what you are spending your money on is a Want or a Need. Going down the list write down what is a Want and what is a Need. Writing down instills it in your mind and decides then and there if you are spending your hard earned money on what you need to be spending it on or are frivolously wasting it on things you Do Not Need.
Once you determine for yourself the things that are Wants your next task is to chip away at how much you spend on those Wants.
Are you spending too much on take-out? Are you spending too much shopping for the newest clothes? Are you paying too much for music, going to the movies, concert tickets, tattoos, etc.? Are you racking too much up on a credit cards and spending all your money on minimum monthly payments that keep you in debt longer and constantly living pay check to pay check?
On your budget sheet next to where you listed the items as a Want write down the top dollar amount you feel you can realistically limit yourself to spending on that item. Can you minimize it to stay under your Take Home pay. If you cannot reduce this to a manageable amount can you eliminate it altogether? I told you this would be painful didn’t I?
Once you have the new dollar amount for your Wants total those numbers together and then add them to the deficit amount you calculated previously. Is that total now in a positive balance? If not, then reevaluate your Wants until it is. The end result will be your personal budget that you can live by to get your finances in order.
Hopefully at the end of this exercise you will have a sum of money on top of your budget that you can use for the days you really can “treat yo’ self” to something special, like a once a month fancy dinner, or a new (cheap) outfit, or better yet something you can set aside in a savings account for the future or even use to pay off debt faster.
Utilizing a budget in this way can only bring a positive relationship you will have with money for the rest of your life. That sounds a little melodramatic, but it is true. Now that you have your budget created take another deep breath and relax. You have now taken your first step to financial independence and rockin’ it at this whole adulting thing.
For additional tools and resources to getting your finances on track I recommend searching your local campus, library, or even bank for financal seminars. Also, finance guide books are an amazing wealth of knowledge (pun intended). The book I feel helped me the most get on top of my finances was Please Send Money: A Financial Survival Guide for Young Adults on Their Own.
Since I started taking budgetting seriously I have been able to not only take better control of my finances, but also pay of a looooooooot of debt that had been weighing me down. I still have a journey to go so sticking to a budget keeps me optomistic about my finances. I wish you the best of luck on your own financial success!
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