Almost everything nowadays comes with a manual, template or instruction. Your new iPhone has a tiny booklet to teach you how to operate it. The clothes you just brought home from shopping have a washing manual. But recall the time when you received your first paycheck — did it come with instructions on how you should spend it? Read on Why You Really Need to Start Budgeting in Your 20s.
Budgeting is like any other teachable skill — the earlier you learn it, the more time you have to understand your strong and weak financial points. Learn the benefits of budgeting and tips to create an effective solution for saving.
Why You Really Need to Start Budgeting in Your 20s
1. Creates a Solid Financial Foundation
Financial literacy isn’t taught much in schools. Hence, college graduates often take 20 years on average to pay off their student loans, with a lack of financial awareness as one of the causes.
You must initiate wealth management into your life and learn from people like Robert Kiyosaki, who authored Rich Dad Poor Dad. Learning about the world of finance — starting with budgeting — can alter your perception of money.
2. Sets You up for Financial Success
With a budget, you can limit your spending, stash a portion as a contingency fund, increase your savings to build financial abundance, and buy your dream home and car. A certified financial planner and company CEO said his self-made millionaire clients started from scratch and mastered budgeting out of all financial skills first before moving on to saving and investing. It’s a fundamental money trick that can set you up for a financial win if you become efficient at it.
3. Allows You to Retire Early
In today’s world, retiring early is your biggest flex. Many of the younger employees in the workplace have a bold dream of retiring early, giving birth to the Financial Independence Retire Early movement. It’s a lifestyle that involves aggressively investing 50% to 75% of your income so you can permanently exit the workplace in your 30s or 40s.
You can aim for a similar goal and enjoy your lifestyle of choice if you know how to manage your money and save more. Keeping your debt to zero — except for your mortgage — can pave the way for early retirement.
How Much Should You Save?
Nothing is set in stone regarding savings, as each person has different financial circumstances. Rent often takes the largest cut from your salary, discounting those still living with their parents. When you get your pay, prioritize savings and non-negotiable expenses, like rent. Unlike adjustable groceries and meal expenses, rent is a fixed cost.
If you’re paying too much for rent, use the 30% and 50/30/20 rules to find how much to allocate. The first is a budgeting standard that entails spending no more than 30% of your gross income on rent. Meanwhile, the second method follows a tiered budgeting plan of 50% for necessities and rent, 30% for non-essential expenditures, and 20% for savings or paying down debts.
Tips on How to Win the Budgeting Game
Many people succeed in following their financial plan because they do it correctly. These tips can help you create and stick to your allocations effectively.
1. Identify Your Free-to-Spend Figure
The simplest way to create a budget is to determine your free-to-spend number. It’s the amount of money left after deducting your monthly necessities and savings. For example, if you earn $5,000 after tax and pay $2,000 for rent, phone plan, electricity and water, and want to save $1,000, you have $2,000 left to spend freely on discretionary items, such as groceries or beauty products.
If you divide $2,000 by 30 days, you have a $66 daily spending limit. Each time you buy a coffee or a takeout meal, ensure you don’t exceed your daily allowance. Depending on whatever works best for you, you can also leverage the 50/30/20 or 30% budgeting approach.
2. Create a Weekly Food Allowance
Once you figure out how much you can realistically spend in a month, your next step is creating a food budget. Meal expenses can quickly rack up and eclipse your necessity savings if you don’t tighten the budget rein.
Avoid dining out or ordering deliveries if you want to save. Restaurants charge nearly 300% on the food they serve, meaning you pay $15 for a meal you can make for $5 at home because of service and convenience. Preparing your own foods allows you to customize them according to your choice of ingredients and taste — plus, it’s more affordable.
3. Track Your Spending
Several mobile apps are available for free download to monitor your spending. Get one of them and list every penny that escapes your pocket whenever you purchase an item with cash or a card. By the end of the day, the goal is to stay within your daily or monthly spending limit.
4. Try a Budget Challenge
Discipline is crucial for developing your money skills. If you find it challenging to stick to your budget, join a budget challenge to keep you motivated and accountable.
Several social groups and financial websites hold savings challenges now and then to encourage spenders to incorporate budgeting into their lifestyles. You can search for groups online or on social media, and do the dare together.
5. Sleep on Impulse Buys
Impulse buying can set your budget off course and evaporate the money discipline you’ve started to build. When you see a high-priced bag or shoes on sale, avoid buying it impulsively. For unplanned spending, give yourself 24 hours so you don’t fall into buyer’s remorse and regret spontaneous purchases.
Start Building Money Skills in Your 20s
Budgeting is a standard but highly valuable financial skill. When you budget, you learn how to manage money — but more importantly, you get familiar with your good and bad spending habits. Start gaining financial literacy as soon as you enter the workforce so you can have a better wealth foundation and future.