Donald W. Reynolds National Center For Business Journalism

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What does it take to be financially independent? A lot of planning, apparently

August 31, 2022

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Photo credit: Yan Krukov of Pexels.com

Learning how to budget your finances and keep track of where money is going each month is a genuine concern for many new (and experienced) employees in the workforce. As someone whose parents recently gave them “the boot,” I’m learning how to fully manage my finances for the first time.

I’m not going to lie, it’s scary and difficult. When my routine $30 oil change on my car quickly became a $300+ charge—for a good reason—I began to sweat. Where am I going to come up with the money to cover everything that daily life requires on top of the surprise expenses that come when you’re not expecting it?

After a quick moment of panic, I sat down at my computer and decided I really needed to create a budget to keep my money in check, and I know I’m not alone in feeling this way. In 2020, the Economic Policy Institute reported that young people, ages 16-24, were employed in economic sectors that the pandemic hit the hardest. Younger workers, they reported, may experience long-term repercussions and two years later, the effects are still visible.

The threat of inflation and pandemic-induced recession stunted early-twenties growth both independently and financially. I know young people now are concerned about their finances after a rocky introduction to the economy and financial independence.

Now that we’ve established the world is scary and money is important, let’s get into it.

How to start

First, you want to set some intentions with budgeting. Why are you doing this? What do you want to achieve? For me, I knew I needed to be self-sufficient and learn how to plan my finances, whether it’s annually, monthly or weekly.

Next, figure out which method of documenting your budget works best for you. Are you someone who likes the fulfillment of physically crossing off a to-do list? Are you someone who needs the ease of an editable Excel or Google Sheets spreadsheet?

Keeping Organized

Once you’ve identified your preferred method of documenting your budget, the next step is to get it organized with your overall budget and the expenses you will be paying. I broke these up into different categories within my overall budget.

They could include:

  • Rent
    • Utilities and electric
    • Renter’s insurance
    • Internet and cable
  • Groceries
  • Gas
    • Routine car payments or maintenance
  • TV subscriptions
  • Gym subscription
  • Other subscriptions
    • Apple, GSuite, Online tools
    • Medication, Insurance
    • Transportation ticket/parking pass
  • Tuition payments
  • Savings / emergency money
  • Fun money (shopping, dining)

It’s worth noting in your budget when these charges will occur, either writing the exact date that rent is due or that you pay $0.99 every month on a recurring charge to Apple. It’s important to have an idea of monthly charges such as student loans or car and tuition payments too.

Knowing how much money you are bringing in each month is key to comparing with your expenses. Including an after-tax paycheck total in your budget will allow you to know a set dollar amount that you will have every two weeks.

Over time, you will learn the average amount that you spend on things like groceries and gas each month and be able to generalize a total that you can set aside in your budget.

But now what?

Now, there are a few methods that you can choose to distribute your money. According to NerdWallet, having two separate accounts within your bank is an important step. A checking account is used for everyday purchases, getting gas, going out to eat and shopping. A savings account is where money can be stored more long-term and eventually creates some sort of interest.

Tip: Look for checking accounts that have no or little maintenance fees. Choose savings accounts that don’t have monthly fees and can get you higher interest rates.

50-30-20 method

This method, named the 50-30-20 method, has grown in popularity because of its simplicity. Every month, every pay period, you have set rules for your money, where it’s going and how you’re going to use it.

50 percent of your paycheck is headed straight to things you know you’ll need. That includes rent, electricity, wifi, groceries, gas and other things you know you will need throughout that month. A good beginning practice is to break down what we think we need versus what we actually need—you may find that more often than not you don’t really need everything you originally thought.

30 percent of your paycheck goes towards “wants.” These are things we obviously don’t “need,” so they get their own chunk. I think of this as shopping, going out to eat, entertainment and other things that may be impulse buys.

20 percent of your paycheck is for your savings account. Adding money each month to your savings account sets you up for success, although it may be hard to set some aside for things you can’t physically see. In 2019, CNBC reported that people found it easier to budget money for their savings accounts when they treated that portion of money like paying a bill. Changing your mindset about your savings account, in addition to the 50-30-20 method, allows you to prioritize saving, instead of throwing in whatever is leftover at the end of the month.

Envelope or “piggy bank” method

This method is good for impulse spenders! The envelope method requires you to have a set spending plan and to physically get cash out to limit your purchases.

Each month, divide up what is necessary for you to pay. Mark each envelope and allow yourself to only open it when necessary. That time could be when paying rent in-person or in line at the grocery store check out.

Steven Donovan, a financial coach, told Bankrate that the key to money management is to improve your mindset; it’s 80 percent psychological and 20 percent dealing with math and money.

Additionally, there are psychological effects behind spending cash versus swiping a credit or debit card. There have been many behavioral economics studies that have proved spending with credit cards is “easier” on our minds, NerdWallet reported. When paying with credit cards, you don’t actually pay for something the moment you buy it, it’s more enticing to worry about it later and not take a dent in your wallet immediately.

Trial and error

It’s important to note that certain methods work better for different people. It will take time to learn how to budget, what to budget for, how much to budget and how to hold yourself accountable throughout the month. Find what works for you and stick to it!

Quick tips 

  • Track your progress
    • You’ll be much more confident knowing how much you saved and how well you were able to stick to your budgets after a few months of practicing 
  • Pay off your credit cards
    • No one wants to get into debt. Know when your credit card payments are, set up automatic payments and make sure you have enough to pay it monthly 
    • Learn the differences between your current balance and your statement balance
  • Look for credit cards that have good benefits for the lifestyles of younger people 
  • Check account statements monthly 
    • If you still aren’t sure where money is headed each month, check your account statements and figure out a plan for next month
  • Learn to cut back 
    • If you are still spending more or unable to stick to your budget, figure out what you are able to cut back on next month and put forth effort to hold yourself accountable next time 
    • Ask yourself the tougher questions, “Did I really need to go out to eat last week? I could have just brought lunch from home.”
  • Keep trying! 
    • It’ll take time and is something you should learn through trial and error.

Good luck, happy budgeting and happy #adulting!

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