Financial success doesn't just happen by itself. The earlier you begin tracking your expenses and planning for your future, the sooner you will be moving away from debt and toward financial independence. The truth is, whether you track your expenses or not, you already have a budget. The only question is how aware you are of what that budget is and how much control you want to have over it.
Know Where You're At
Before you begin planning a budget, you first need to know where your money is going. There are smartphone apps and computer programs that can make this relatively easy. Whenever you buy something or make a payment, take a moment to record it. After a month, look at your expenses and determine what percentage of your income is going toward rent and utilities, meals, clothing, transportation and other costs, as well as how much you are currently saving.
Pay Yourself First
For building lifelong financial stability, the principle of paying yourself first should be at the foundation of any budget. It essentially means taking a percentage of your earnings, such as 10 percent, and immediately putting it in a separate savings account. From the remaining amount, you can budget your money as needed. For young adults with student loans and entry-level wages, 10 percent may be difficult to manage at first. In this case, beginning with even 1 percent is better than nothing. Whatever amount you can afford today can be increased over time until you are setting aside 10 percent or even 20 percent of your income into a long-term savings system.
Know Where You're Going
Ideally, you should be looking at spending no more than 35 percent of your after-tax income on housing or rent. Transportation should take between 5 percent and 15 percent. Food, including groceries and eating out, should account for 10 percent to 15 percent. Clothing, toiletries and other personal items should account for no more than 10 percent of your after-tax income. Health care and loan payments should each take no more than 15 percent. Utilities, such as electricity and phone services, should take up no more than 7 percent of your budget. Entertainment should be limited to no more than 5 percent of your budget.
For many young adults just getting started in the work force, target budget percentages may seem completely unrealistic. For example, rent alone may take up to 50 percent of an entry-level salary. Until your income rises, this simply means you will have to cut down the percentage on other items, such as eating out and clothing. As your income does rise, it's important to keep aiming toward these target percentages rather than bumping up your expenses. For example, if you plan to buy a house, it's unlikely your mortgage will be approved if your mortgage payments will account for more than 35 percent of your income.
- David Sacks/Digital Vision/Getty Images