As a recent college graduate, I’ve come to realize that there’s a lot to learn very quickly about your personal finances. A lot more than you’d realized before graduating! After going through some trial and error, I decided to write a series of blogs on personal finances that are focused on giving advice to people who are at the same stage of life as me. The series will have topics ranging from good and bad debt, to beginning to save for retirement. I’m excited to share my findings with you all and stay tuned for the next installment!
- Mason Callesen
The Financial Journey Begins – The Budget
Starting your career is a very liberating chapter in one’s life; the world is open to you more than ever before, now that you have your own income! Which is what we think for about ten minutes until the bills start rolling in. Let me rephrase that, it IS a liberating chapter, but it is also a time where personal responsibilities need to be realized and put into motion. One of those responsibilities is your personal finances.
The best way a new full-time worker, such as yourself, can start off on the right foot with their personal finances is through budgeting. Budgeting is the road map for what you hope to achieve in the future, and the life source to your personal finances. What we hope to accomplish in this article is to create a basis for effective budgeting.
Before you begin budgeting, you need to find what goals you want to achieve with all that saved cash. This is done through creating financial goals. Goals are what should drive you to stick to your plan, making the most exciting part of creating a budget. The goals you create should be organized by the amount of time it will take to achieve them; short, medium, and long-term.
Short-term goals can be achieved in 12 months or less. These goals could include a trip you are planning within a year, or a steppingstone to medium or long-term goals. Mid-term goals take 1-5 years to achieve, for example, paying your car off within 3 years. 1-5 years sounds like a long time, but financial goals are limitless and can often take much longer to achieve. Finally, long-term goals, like the name states, take the longest to achieve, over 5 years. These goals are the big drivers of your personal finances and encompass such achievements as what amount of money you’d like to retire with, where you’d like to live later in life, starting your own business, etc..... Having your goals where you can review them is important too. Having a reminder close at hand of what you are budgeting for is essential to your financial success.
Now that you have outlined your motivation, it is time to create your budget! Step one; pay yourself first. This means that, when you sit down to pay the monthly bills; before you pay rent, utilities, or car payment, your first check is written to a retirement account. Paying yourself first creates discipline in your spending as well as mindfulness of what funds you have to work with going forward. If your employer has a 401k plan, this can be easily done through an automated contribution before you even receive your check. If this option is available to you, your 401k administrator can help you with setting up the specifics of your account. Retirement should account for 10 – 20% of your paycheck. This topic is covered in another article on our website which is worth checking out! (**Please insert link to blog on website posted 5/27/2022 titled “How much should I be saving for retirement”). Next, we will review how to structure your expenses.
Living Expenses - A common rule of thumb when it comes to your rent and utilities is that they should not exceed 30% of what you make. Don’t worry, if your costs end up being higher than this, you don’t need to cut off the heat and live in a jacket all winter! Finding a roommate to take on some of the cost is one way to remedy this. If it is significantly over, it could be in your best interest to find housing that is priced lower.
Food - Food should only take up to 5-10% of your paycheck. If you are over in this category, consider cooking food at home more often, it is shocking how much cheaper this is versus eating out. Also note, this does NOT mean you need to stop eating your favorite fast food. What it does mean is that you should be cognizant that the cost of eating out too often can build up quickly.
Debt – There is a huge misconception about debt in the US. Debt can be a very useful tool, though if not correctly managed, it can be detrimental. Paying off debt as it comes due is a must. Accumulating too much debt crushes your financial wellness. To curb this issue, debt should account for no more than 25% of your paycheck. This is a very important topic with a lot to be said about it, so debt will be covered extensively in a future blog.
Entertainment/ Leisure – Entertainment should account for 10-20% of your budget. Personal Note: I used to think of a budget as handcuffs that stopped me from having fun. Surprisingly though, when I did this aspect of the budget, I found it to be quite liberating. You can still spend on things that are fun, but it’s accounted for. This is often the hardest place to manage a budget, so it is always important to keep it in mind before making a purchase.
Now that we have our categories lined out, it is time to put pen to paper! Deciding what medium you will use to create and track a budget is just as important as the plan itself. Here are a few ideas that you can use to track and manage a budget.
- Good ol’ pen and paper - The first way to track your budget has already been named; on the classic notebook. This gives a lot of freedom to figure out how you want to see things put down. You also get the benefit of not needingto learn how to operate a new app or finnicky program. The downside to this is that it can be messy and updating can be time consuming. You could also spill coffee all over it, and nobody is happy after that happens… :)
- Excel – Excel is an extremely useful tool and works very well with creating a budget. The use of auto sum and other formulas allows users to update their budgets quickly and easily calculate what values matter to them. Excel also has a lot of available templates that are premade and easy to use for budgeting. The negative that comes with Excel is, if you do not know how to use it, Excel can become quite time consuming to learn. There are limitless tutorials on the internet on how to use Excel, so do not let the learning curve discourage you!
- Apps – There are numerous apps that can help with managing a budget. The best part about an app is that it streamlines the process so that you don’t need to create a system, and updating it is easy. In addition to that, they often have reminders and warnings when you are not staying true to your parameters. The issue with an app is finding the one that suits your needs. Make sure to read reviews before you pick one out! Some great apps for budgeting are Mint, YNAB, and EveryDollar.
While this article does cover a lot of what you should know about budgeting, there is always a lot more to learn! The Callesen Wealth Management team suggests using the following materials to not only learn more about budgeting, but to also help you actively budget.
- Financial Peace University – Best place to get a basis for managing personal finances. Dave Ramsey and his team make personal finances fun and very engaging. Local churches often put on Financial Peace University programs for free. - Mason
- www.simplifimoney.com - a website and app that can be used to track spending, subscriptions, and savings by linking your financial accounts and viewing transactions all in one place. Here, you can also set up a budget and watch your progress throughout the month. - Sarah
Thank you so much for reading! – Callesen Wealth Management Team