How to Build Your First Budget as a Millennial
Creating a budget is perhaps the most important move you can make with your finances if you’re just beginning in your career. You may be like most millennials who are balancing student loans, rents, car payments, and a thousand other expenses, but it is important to note creating a budget can help you get a grip on your finances and make smarter money decisions. In our guide here, we’ll take you step by step on how to build your first budget.
Why is Budgeting Important?
Budgeting helps you:
- Track your spending because you don’t want to overspend or forget about little spending.
- Put away money down the road for such things as purchasing a home, opening a business, or going on vacation.
- Do not incur debt, since you know where your money is going and you can reduce unnecessary expenses.
- Cut back on the stress of not knowing how your money is to be used by having a plan for it.
Step 1: Calculate Your Income
The first order of business when building a budget is understanding what comes in every month. This is called your income. For most millennials, this will be your paycheck, but it could be side hustles, freelance work, or other sources of income.
Tip: Remember to take into consideration taxes that are taken off of your paycheck. Base your budget on your net (after taxes) income, not gross (before taxes) income.
Step 2: List Your Monthly Expenses
Second, you need to note down all your expenses each month. Expenses can be classified into two categories:
- Fixed Expenses: These are costs that occur constantly and in regular patterns. Examples include:
- Rent or mortgage
- Utilities (electricity, water, internet)
- Car payments or transportation
- Insurance premiums (health, car, etc.)
- Student loan payments
- Variable Expenses: These costs may vary from month to month. Examples include:
- Groceries
- Dining out
- Entertainment (movies, concerts, subscriptions)
- Shopping (clothes, gadgets)
Tip: Budget your expenses for one or two months to have a better idea of how your money is being spent.
Step 3: Set Financial Goals
Before you get on a budget, it’s important to know what you’re striving for. Stating your financial goals can keep you motivated and on course. Your goals might include:
- Build an emergency fund for lean months (3-6 months worth of living expenses)
- Paying off credit card debt
- Saving for a down payment for a house or car
- Building your retirement savings
Tip: Set your goals SMART (Specific, Measurable, Achievable, Relevant, Time-bound). For instance, “Save $500 for an emergency fund by the end of the year.”
Step 4: Choose a Budgeting Method
There are many budgeting methods to choose from, and you should pick the one that suits you. Here are some popular options:
- 50/30/20 Rule: This approach is easy and works well for beginners. It suggests that you allocate:
- 50% of your income to needs (housing, electricity, groceries)
- 30% to wants (entertainment, restaurant, subscriptions)
- 20% for savings or debt reductions (emergency fund, retirement, loans)
- Zero-Based Budgeting: This method assigns every dollar you earn a job. You budget all your income towards either certain expenses, savings, or debt so that your budget sums to zero.
- Envelope System: In this system, you allocate cash for each category of expenses (groceries, dining out, etc.). Once your money runs out, you don’t have any more money left to spend on that category for the month.
Tip: Begin by using the 50/30/20 rule if you’re a newbie in budgeting because it’s a good rule to start from and very easy to follow.
Step 5: Track Your Spending
It is also important that once you’ve set your budget, you ought to monitor it to avoid overspending. If you want, you can do this manually with pen and paper or with the help of apps such as:
- Mint: Tracks your expenses automatically according to the categories.
- You Need a Budget (YNAB): Helps you define your goals, keep a record of your expenses, and save.
- GoodBudget: A virtual envelope budgeting application that is a cash management app without the use of physical envelopes.
Tip: Examine your budget regularly on a monthly basis and make necessary changes. Life is changing and so should be your budget.
Step 6: Make Adjustments as Needed
Your first budget may not be perfect, and that’s fine! The idea is to learn and get better through the process. If you discover that you are overspending in one category, try to adjust in another. If you can’t save any more, you should cut down on discretionary expenses (such as entertainment or dining out).
Tip: Don’t be too hard on yourself when you fall off track. Budgeting is a learning process.
Step 7: Invest in an Emergency Fund
One of the major parts of your budget involves saving money for emergencies. An emergency fund will ensure that you do not go broke covering random unexpected costs such as medical bills or car repairs. Your emergency fund should cover 3-6 months of your living expenses.
Tip: Start small. Attaching $50 a month even can help you develop your emergency fund in the future.
FAQs About Budgeting for Millennials
What do I do if my income is not fixed?
If your income varies from month to month (for example, from freelancing, etc.), use the least income month as a basis and make a budget. Distribute the remaining revenue of busy months for the less busy ones.
What if I’m living from paycheck to paycheck?
Prioritize the reduction of non-essential expenditure, and raise a little emergency fund. Think about picking up a side hustle or asking for a raise.
How do I save while being a millennial?
Use the 50/30/20 rule to save money, follow your budget, and find ways to cut down on discretionary spending.
Do you need to follow every expense?
Whenever possible, accounting for every expense can help you seek ways of reducing your expenses. But you don’t have to keep track of every penny. First, focus on big categories, such as groceries, rent, and entertainment.
How frequently should I take a look at my budget?
Review your budget each month to check that you are heading in the right direction and adjust accordingly. Regular reviews help you stay on top of your finances.
