Budgeting Tips for Young Adults

A budget is a plan for the money you make and how you spend it. If you’re earning and spending, you should also be budgeting and saving. It’s the key to financial stability and living the kind of life you want to live. It’s important no matter how much, or how little, you make.

It’s never too early to budget. If you earn money, even at a part-time job while in school, you should be budgeting. Do you own a car or want one? Buy your own clothes? Hope to go to college? Get a place of your own? Budgeting will help you achieve those goals.

Budgeting may sound boring or complicated, but welcome to adulthood. It’s worth the effort. Budgeting gives you power, allowing you to control your money rather than letting your money control you.

Budgeting for young adults means making good decisions and doing some hard work. Here’s a guide to make the process manageable.

1. Choose a Budget Method

Americans and budgeting don’t mix as well as they should. Depending on what survey you believe, anywhere from 44% to 88% say they have a budget. One thing is clear: a lot of people who say they have a monthly budget don’t stick to it. A recent Next Gen Personal Finance survey found that 84% of people who budget regularly spend more than what was budgeted and use credit cards and other methods to make up the difference.

Budgeting tip: If you regularly exceed your budget, it’s a wish list, not a budget. The point of budgeting is to set spending goals and stick to them.

“Often, individuals struggle to track their expenses and understand where their money is going,” Benjamin Stroh, of CNY Advisors, said.

At its core, budgeting is simply a matter of tracking how much money you have coming in monthly, what your bills and expenses are, how much you have left over once they’re paid, and what you do with the extra money. Some of that “extra money” should go to savings, for emergencies and short and long-term goals.

There are many budget strategies, but the choice of how to make a budget, is up to you. There are resources that can help, including apps, software, Google and Microsoft spreadsheets, templates, and books. If you’re most comfortable just writing it down every month on a piece of paper, that works too.

Whatever method you choose, set up automatic payments for as many bills as you can. Most utilities, credit cards, mortgages and other monthly bills will take the money out of your account on a specific date. Some even offer a discount if you pay automatically. Just be sure the money is in the account when the bill is due.

Some of the budget methods listed below can be combined. For instance, the envelope method can work with a variety of other methods.

One important budgeting tip to keep in mind: You are the one in charge of your money. If a method doesn’t work for you, change it to one that does.

The Zero-Based Budget

The zero-based budget means that every penny of your income is accounted for. Sometimes called a zero-sum budget, you should end up with zero once your income is distributed. That doesn’t mean that whatever is left over after paying bills has to be spent on something. It means you should use what’s left over to target savings, retirement accounts, emergency accounts and paying debt.

The Pay-Yourself-First Budget

With the pay-yourself-first method, you make retirement and emergency fund or other savings accounts a priority. The money targeted for those goes into their accounts first, before you do anything else. What’s left over is what you use to pay bills and other expenses.

The Envelope System Budget

Initially, this method meant putting cash into envelopes designated for separate expenses, like utilities or groceries, after you cashed your paycheck. Now, with direct deposit and most bills paid online, there are “envelope” apps that serve the same purpose. Research them for fees and ease of use before committing. Consider, too, whether putting cash in an envelope, old school, for expenses like groceries instead of using a card will help you stick to your budget.

The 50/30/20 Budget

A proven method of budgeting is to allocate 50% of income to needs, 30% to wants and 20% to savings. You may have to figure out how to cut your expenses to make it work, but that’s not a bad thing. However, if your rent is 50% of your income, and you still have to buy groceries, gas, and pay for utilities, you may have to reduce other expenses to make it work.

2. Have an Emergency Fund

An emergency fund may not seem like a necessity until a costly emergency like your pipes bursting, your car conking out, or losing a job creates chaos in your home. If the money you set aside for rent, or a car payment has to be diverted to solving an emergency – and the rent or car payment goes unpaid – you’ve got big problems.

Experts suggest the ideal emergency savings account has enough to cover 3-6 months of expenses. If that seems out of reach, think of it as a long-term goal that won’t happen unless you start saving now.

If you are paid by direct deposit, have a portion of your check go directly to a savings account. If you can, put the money into a high-interest account, which will help it grow faster. Just be sure it’s an account you can access in emergency situations.

If you’re afraid you’ll be tempted to tap into it, open an account at a separate bank or credit union from where you have your primary account. Don’t get a debit card and resist the urge to set it up as a transfer option with your checking or other accounts.

3. Educate Yourself

The more you know about your money and how it works, the better you’ll be at managing it so you can handle emergencies.

There are many resources on budgeting and financial tips for young people, almost all of which can be found with an internet search.

Some places to find free budget tips for young adults are:

• Credit unions, as well as some banks, offer free financial literacy courses and education tools that touch on the basics of managing money. Credit union and bank websites often have pages with resources dedicated to budgeting and other financial literacy topics.
• Look for free local money management courses offered by nonprofits, local colleges, and adult education programs.
• There are many books for teens and young adults about managing finances. Go to a search engine and type in “financial education books for young adults” and see if there is one that appeals to you.
• There are dozens of podcasts about finances and managing money. Visit your podcast provider’s shop to find one that appeals to you.

4. Set Short and Long-Term Goals

It’s easier to budget and save money if you have something to aim for. Your budgeting process should include setting short and long-term goals. Even if you can’t save much toward these goals, setting them will help you manage money.

Short-term goals may be buying a car, getting your own place or going back to school. Long-term goals may be having money for an early retirement, starting a business or a family, or buying a house.

Setting goals is not just about saving money, it’s about structuring your finances in a way that will make achieving the goals possible. That means having a good credit report and credit score, not piling up debt and forming good financial habits.

Setting goals also keeps you on track when you’re tempted to blow up your budget. If it helps, put a photo representing your goals on the refrigerator, or create a vision board that will keep your goals at front of mind.

How to set financial goals, starts, of course, with budgeting. It also means seriously thinking about what your priorities are. Life changes, and if your priorities do, you can always change your goals. Having them in the first place, though, is key.

5. Pay with Cash, Not Credit

When possible, use cash to pay for everything you buy. Credit cards may seem like an easier route, but you are taking out a loan with very high interest. If you don’t pay it back within a month, you are building a mountain of debt it’ll be hard to climb out of.

Using cash will help you stick to your budget. Keep the cards at home when you go out to eat or grocery shop. If you’re buying online, only buy what you can afford to pay for from that month’s budget.

6. Save for Retirement

Your older self will end up really mad at your younger self if you don’t save enough money to retire on.

If you have a full-time job and it offers a 401(k), take advantage of it. If your employer doesn’t have a 401(k), you can open a traditional IRA, a Roth IRA, or, if you’re self-employed, a SEP-IRA. Talk to a financial planner or your local bank or credit union about how they work.

Putting money into retirement accounts will get you a tax break now and a feeling of financial security later. Saving and investing for life will make it easy to retire without worrying that your money will run out.

“Saving for retirement early allows young adults to take advantage of compounding returns and gives them a longer time horizon to weather market fluctuations,” Stroh said. “It also ensures financial security and independence in later years.”

7. Invest Early

Stroh said that investing is his number one financial tip for young adults. “Start investing early and consistently,” he said. “Compound interest works wonders over time, so the earlier you begin, the more your money can grow.”

Just like saving for retirement, putting money into an investment account will bring you more money in the long run.

If you’re wondering whether to pay off debt or invest, don’t look at it as an “either/or.” If you can afford to invest a little, do it, even if you’re also paying off debt.

Start small and be sure you can afford to invest. It should be an amount you can afford to lose without it hurting your finances. That is called managing risk. There are many different ways to invest. Do some research and decide what will work best for you.

8. Understand Taxes

If you earn money, you pay taxes on it. What you make before taxes and other deductions is your gross income; what you bring home is your net income.

Aside from federal income tax, you may live in one of 43 states that has a state income tax. Other deductions are for Social Security tax – money you’ll get back when you reach retirement age – and Medicare. If you are self-employed, you will have to pay income tax yourself as well as self-employment tax.

When you are offered a job, keep in mind that the salary or hourly wage is pre-tax. Look up federal and state tax rates to get an idea of how much will be deducted for taxes, and what you will actually bring home.

You can decrease the amount of taxes deducted from your income by putting money into a retirement account, a flexible spending account for health care or a health savings account.

9. Pay Off Debt

Debt can destroy your financial health by sucking up a huge amount of your income for monthly payments. The more payments you miss, the more it will hurt your credit score, which in turn will make it harder to get needed credit, increase your insurance premiums and even make it difficult to get an apartment or job.

If you have credit card debt, paying it down or eliminating it will free up a large amount of money monthly to put toward other bills or savings. Or even splurge on a pizza (with cash, not a credit card!).

You can pay down debt yourself or speak to a credit counselor at a nonprofit credit counseling agency like InCharge Debt Solutions to learn how to do it in a way that works best for you. Follow the link for tips on how to be debt free by 50.

10. Keep a Good Debt-to-Income Ratio

Debt-to-income ratio is how much monthly debt you have in relation to your monthly income. This may not even be a blip on your radar, but if you want to get a car, or buy a house, it will suddenly be very important. Most lenders look for a DTI of between 30%-40% before approving a loan.

If your DTI is higher, but you have a high income or other assets, lenders may make an exception. If you are approved for a loan or credit and have a high DTI, though, you can expect to pay higher interest and fees.

It’s much easier to reduce debt, which is totally in your control, than to increase income. Studies have found, too, that increasing income doesn’t necessarily lead to a better DTI – as your income climbs your debt may as well.

Calculating your debt-to-income ratio involves adding up your monthly net income, calculating your debt (this is money owed to creditors, not things like your cable bill), and determining how they match up.

11. Manage Major Expenses

Most adults, even young ones, have major expenses to manage. The biggest are shelter and transportation. You may have a vision of what type of place you want to live in and what kind of car you want to drive, but that must be tempered by what you can afford. Getting evicted, a foreclosure, or a car repossession has a negative impact on your finances that lasts years.

Living within your means is more than just a suggestion, it must be a firm rule. This not only includes the “price tag” of a major expense, like rent or a car, but how much it will cost you monthly. When considering how much rent you can afford, take into account whether utilities, like heat, Wi-Fi and cable, are included. Are there other costs and fees involved? Will living there mean increased transportation costs to get to work or the supermarket? When you buy a car, consider not just what the monthly payment will be, but insurance, how fuel-efficient it is, what the maintenance costs will be and if it’s practical for your needs.

One tip if you can’t swing housing costs and must live with your parents or other family members: Insist on paying rent, and helping with utilities and groceries. This will lessen the sticker shock when you have a place of your own, and also help you get used to paying bills and managing expenses. You may be stunned to find out what the electric or grocery bill for the household is.

12. Practice Frugal Habits

Housing, transportation, and food are the biggest expenditures most households make, according to the federal Bureau of Labor Statistics. All are increasing in cost, and all are necessary for living, but that doesn’t mean you can’t manage how you spend money on them.

Once you have a budget, you’ll likely have to rein in spending. This means thinking about what your habits are and how you can spend less. Making your own meals is considerably less expensive than eating out or getting takeout. If you don’t know how to cook or prepare food, it’s easy to find tips online, on YouTube, local community centers, or adult education classes. Some supermarkets offer free programs on nutrition, shopping, and food preparation. Joining a rewards program at your grocery store and gas station can save you a lot of money.

Frugality means only buying things you need; getting a broken item repaired or going without instead of buying a new one; and finding clothing or furniture at thrift stores or consignment shops. Car-pooling or taking public transportation can save a lot of money on gas.

There are many ways to be frugal, but the bottom line is to think before you spend. Can you afford it? Is it a need, or is it just a want? Is there a way to achieve what you want without spending as much money on it? Don’t spend money that’s not in the budget on things you can do without. It may be hard at first, but once you develop the habit, you’ll thank yourself.

13. Automate Savings

It’s much easier to stick to a savings plan if the money goes into the account before you even know you have it. Online banking and digital apps make that a breeze. If you have the option at your workplace, have a portion of your pay go into a savings account before you even see it. When you fill out the direct deposit paperwork, it usually allows money to be split between banks. Many workplaces now also use pay apps that allow you to easily put aside money from your check for savings.

Your bank’s website likely has a function that allows you to set a certain amount to regularly transfer to another account, even if it’s at a different bank.

Making savings automatic is so easy there’s no reason not to do it.

14. Personal Finance Apps

Personal finance apps put budgeting and managing money literally at your fingertips. Apps send your money to accounts, track your spending, send you alerts when accounts are low, help you monitor your credit score, and even help you invest.

The best budget apps are the ones that you will be comfortable with and use consistently. When checking out apps, be sure to research fees and ease of use. Some will require a lot of initial work. If you don’t do the work, the app can’t do its job. Many are free for basic functions, but you’ll likely have to pay for add-ons to do everything you want.

Some of the best personal finance apps for budgeting and other money managing tools are:

• Acorns – Puts extra money into investment accounts
• Mint – Automatically tracks expenses and spending
• Mvelopes – A digital form of the envelopes method of budgeting
• Pocketguard – Shows you how much money you have left to spend after all your expenses are covered
• Rocket Money – Tracks your budget and spending, as well as subscriptions, making it easier to get rid of the ones you’re paying for but not using
• You Need a Budget (YNAB) – Walks users through the budgeting process, and uses the envelopes method to sort expenses

15. Get a Side Hustle

A second job to add to your income can be a great way to make your budget work. Do the research and make sure it’s a good fit before counting on the extra money.

Depending on where you live, driving an Uber or Lyft, doing Instacart or Amazon delivery, might increase your income. Retail establishments, restaurants, and other hourly wage businesses are always looking for workers.

Side jobs only help if you make extra money. The “average hourly wage” of side hustles like Uber and Instacart isn’t a guarantee you will make that amount, or even a fraction of it. Keep in mind the cost of insurance, gas and other expenses that will eat into whatever you make. If you live in an area without the population to support a lot of work from these services, you may find that your wasting time for pennies an hour.

With a self-employed side hustle, you also have to pay taxes on your earnings, and in some cases upgrade your insurance and other requirements. If you get a part-time retail job, be sure the schedule won’t interfere with your full-time job and the time commitment makes the extra money worth it.

It’s almost always easier to cut expenses than to increase income. If you get a side hustle, that extra money should go to savings or paying bills, not to more spending. If you haven’t developed good money managing habits, making more money will not solve your budgeting problems.

16. Separate Needs from Wants

We’ve mentioned “needs” and “wants” in this article. But what does that really mean?

Needs are the basics that you must have in order to live: shelter, food, clothing, transportation. Wants are the things that you’d like, but can live without. Sometimes it can be hard to tell the difference, but as you hone your budgeting skills, you’ll get the hang of it. Ask yourself, before you spend, “Is this necessary for me to get through my day-to-day life?”

17. Talk to a Professional

Don’t beat yourself up for not knowing how to budget or manage money. Even if you’ve developed bad money habits or accumulated a lot of debt, there are many sources of financial advice for young adults that can help you get on firm financial footing.

Talking to a professional can help you create a budget and come up with a plan for your money that will give you a solid foundation for years to come.

Nonprofit credit counseling agencies provide a free session with a credit counselor who will review your finances with you and suggest educational tools and resources. They may discuss strategies like debt management or debt consolidation if you’re struggling with credit card debt.

Local nonprofits, your area’s Community Action Program, and some credit unions and banks also offer free financial counseling. If your financial issues are housing-related, whether it’s rental housing or ownership, the local housing agency or authority has counselors, classes and other resources.

If you are all set with a budget, but want advice about how to save and invest, seek out a certified financial planner. Look for one who is a fiduciary, which means that they are required by law to offer you advice that’s in your best interest, not to sell you a product.

Getting financial advice from a professional can help you put these budgeting tips into practice, setting you up for success.