As you begin your life as a young adult, you’ll have many things to worry about such as getting a house, car and settling down. While managing your finances may not be your top priority, however, it is still an essential aspect of your life that should not be overlooked.
Starting off with the right budgeting habits can give you a strong financial head start for the years ahead, be it knowing how to choose a right budgeting strategy or understanding your expenses. I would advise everyone to start as early as possible to inculcate good habits.
Whether you’re new to budgeting or have struggled in the past, these budgeting tips can definitely help you kickstart your financial planning journey.
1. Understand Your Expenses
This is a crucial step in managing your budget and achieving your financial goals. Most young adults have different types of expenses to factor in when coming up with a budget. Generally, I like to separate them into two categories – Essential & Non-essential. I can’t stress the importance of understanding the difference between needs and wants. Always focus on the essentials such as groceries, utilities and transportation expenses. Non-essential things such as watching movies or dining out are good to have once in a while.
Personally, I like to come up with a list of all my expenses to help me get a better understanding of where my money is going. Next, I would categorise my expenses so that I could identify areas where I may be overspending or where I can cut back.
2. Choose a Budgeting Strategy
Creating and aligning to a budget is a critical step towards achieving financial stability and achieving long-term financial goals. There are various budgeting strategies available, so it is important to choose a strategy that fits your lifestyle and helps you meet your financial goals.
Envelope budgeting is a popular strategy whereby you put cash in envelopes to represent different categories of expenses, such as dining out or entertainment, and once the envelope is empty, you have to stop spending in that category.
If you’re looking for a simple budgeting strategy, the 50/30/20 strategy may be the one for you. It suggests allocating your income into three categories: needs, wants and financial goals. With this strategy, 50% of your income should be used for needs such as transportation, groceries and housing. 30% of your income can be used for wants such as dining in a fanciful restaurant or travelling to Maldives for a vacation. The remaining 20% should be set aside for your financial objectives such as investments and savings.
3. Add Some Breathing Room
No budget is ever perfect. There may be times where your expenses may slip through the gaps – such as the super cool backpack that you bought on impulse. It is crucial to take precautions to keep your budgeting on track.
You may add some breathing room to your budget by creating a margin. Identify how much of your income you don’t need to spend each month and set them aside. It allows us to absorb the surprises that pop up every month without needing to resort to loans just to send the car for repair. Ideally, you would want to have 5% to 10% of margin.
4. Pay Yourself First
When trying to budget for so many expenses, it may seem quite daunting to find money for savings and investments. You may want to budget your savings before anything else and pay your expenses with whatever’s left after planning for savings. This is referred to as “paying yourself first”.
If you make it a habit to deposit or transfer money into your savings account every time you get paid, you may be less likely to spend it on your daily expenses. This practice can help you develop a saving habit that will add up over time and prepare you for large or unexpected expenses.
5. Revisit Your Budget Monthly
Creating a budget is an excellent way of tracking expenses and ensuring that your money is being spent wisely. Budgeting, on the other hand, is not a one-time event. Certain expenses vary from month to month or occur erratically such as bringing your parents to an unplanned overseas trip or an impulse purchase on that Gucci bag that you’ve wanted for a long time.
It is crucial to revisit your budget on a regular basis, ideally monthly, to ensure it’s still accurate and reflects your current financial situation. This will assist you in identifying areas where you may be overspending or where you may be able to cut back and save money. Furthermore, if you’re saving for a specific goal, such as a down payment on a house or a vacation, revisiting your budget on a monthly basis can help ensure you stay on track.
Budgeting is a crucial skill for young adults to develop as it helps them manage their finances effectively. By following these tips, young adults can take control of their finances and pave the way for financial success. Developing these habits early on can help to establish healthy spending habits and set themselves up for success in the long run.