Congratulations, recent college graduate. Welcome to the world outside of academia, which as you’ll soon find out (if you haven’t already) primarily runs on money.
The good news is, a lack of cash doesn’t have to be a problem for anyone, regardless of income, with some attentive planning.
Here are some important tips for the young man or woman who’s just now out on his or her own after graduation, paying the bills and figuring out how to stretch every dollar as much as possible. Note: These budgeting tips appear in order of importance.
Budgeting Tips: Keep Track of Every Dollar You Spend
This isn’t a philosophical mindset or a cautionary tale of not blowing too much of your money on wasteful or stupid things.
Quite literally, one of the best ways to get control of your money and allow yourself to make a realistic budget is by figuring out where your money is going.
Spent a dollar at a vending machine? Write it down. Spent $6 at a drive-thru? Write it down. Spent $14 at the movies this weekend? Write it down.
The purpose isn’t to annoy you to the point where you don’t want to spend any of your hard-earned money because keeping a log is too much trouble. The point is to help you keep a tally on where the money actually goes. Most people are surprised (or would be, if they kept track) to learn at the end of the month they’ve spent $300 just on casual-dining lunches.
Here’s an alarming fact that will motivate you to do this: On average, after paying for things like rent, insurance, cell phone bills, etc., the average-paid worker in the U.S. only has between $20 and $40 worth of discretionary income to spend on things like restaurants and movies.
Budgeting Tips: Make an Actual Budget
Feel free to call it part 2 of the first budgeting tip — keeping track of where every dollar goes — if you want, as it should be done in conjunction, but pre-allocate how you’re going to allow yourself to spend every post-tax buck you get.
Most of that income will already be spoken for, with rent or a mortgage payment, car payments, health insurance and groceries. Gasoline and clothing are also something that aren’t optional in most cases.
The good news is, those expenses are relatively fixed from one month to the next. Your paycheck may not supply all of them in the way you’d like them too, so making a budget will in fact force you to prioritize what you have to have and what you’d like to have but can perhaps do without.
For instance, while you’d like to have “gold plan” health insurance and a new Mercedes, the numbers may only support a used Ford and a bronze plan. The budget will help you not overspend money you don’t have.
Yet, most people never make an actual monthly budget. Big mistake.
Budgeting Tips: Avoid Debt at All Costs, But…
If you’re a recent college grad, odds are good you’ll have at least some student loan debt. Even just paying it back $50 or $100 bucks per month can be a surprising burden. Don’t add to that burden by racking up credit card debt too.
Here’s a little motivation to that end … for every thousand dollars you owe on a credit card debt, it will cost you $511 worth of interest charges just to pay it off by making the minimum payments.
However, that’s not to say you shouldn’t have a credit card.
Aside from having one for emergencies, using a credit card WISELY helps establish a much-needed good credit score. If you can discipline yourself to view it as a bank card and pay off charges as soon as they’re incurred, you’ll usually avoid any finance charges.
Budgeting Tips: Establish a Safety Net
While a monthly budget is a game plan, there’s no way of budgeting for the unexpected expenses that invariably pop up in life.
A trip to the ER, a car repair, or a plumbing emergency aren’t terribly uncommon, but they are terribly costly.
To prevent such an event from destroying a monthly budget, work on developing a “rainy day” fund from the very first chance you get to. Even if you can only chip in $50 or $100 a month into the savings pool, in a year you’ll have several hundred dollars to cushion yourself against unforeseen financial blows.
Indeed, contributions to this emergency fund should be part of a monthly spending plan.
Budgeting Tips: Learn and Get Discipline
Finally, embracing the previous four tips will mean nothing if you won’t force yourself to stick to your own approach, and your own math.
You have to be and remain disciplined about money at all times, as it can be spent a lot faster than it’s earned.
It may help to enlist a parent, friend or relative for help, as they’ve been through it before. Their job is primarily to help hold you accountable, so don’t snap at them for doing you the favor when you feel like they may be unfair — they’re usually just being honest. You’ll thank them for it later.
Or, if opening up your personal financial life to a helper seems too uncomfortable, prepare to be honest with yourself about you’re spending and saving habits every single day.
Finally, one last bit of encouragement: Whether you’re a budgeting ninja or a budget-buster, all bad habits can be replaced, and any good habit can be learned. It’s just a matter of deciding to stick with it.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.