Ultimate guide to budgeting in your 20s

Since purchasing my first home in late 2014, It’s been a lot more challenging managing my finances and quickly realizing a big chunk of what I make goes towards paying the bank or the bills!  Budgeting wasn’t something taught to me by my parents or at school but I knew it was something I had to get a grasp on if I wanted to be in financial control.  Below I have put together a guide on how I manage my finances and budget, hopefully it will be a helpful tool for you who are also looking to gain financial freedom and reaching your financial goals.

Have a goal in mind

Before you sit down and do any number crunching or planning you have know what your short term and long term financial goals are.  Having a clear goal to strive for will not only help you stay motivated and stay on track but also means you won’t risk spending it all before you hit your goal.

When I first started my goal was to pay off a portion of my mortgage by end of year and save up for a vacation to New Zealand before September 2017.  I knew exactly what numbers I had to achieve to make these goals realistic by also achievable.

Work out exactly how much you need to save to meet you goals, but remember be realistic and make sure they are achievable.  Everyone’s circumstances are different and your goals will be much different to your friends around you, so plan for what you can achieve.

“20% of what you earn is yours to keep”

A powerful I read from a book few years back which talks about investments and savings from a young age.

Many guides out there on the internet usually goes in the format of something like this;

  • How much you earn
  • minus, how much your fixed monthly costs are
  • minus, how much your variable monthly costs are
  • equals, you income available for savings

However I feel its important to save a portion of what ever you make each week (or fortnight or month) before you even touch it!  For example, each month when I get the pay check in the bank, the first thing I do is to transfer a percentage (usually 20% fixed) of it into a long term, high interest savings account.  The money I can only access in the later date in the future and will sit there, accumulating interest.  This way I prevents me from ever touching it or spending.

Monthly planning are best and will give you a high level overview of your financial situation for that month.  Work out how much it is you earn, and apply a (reasonable percentage) savings discount to it.  What ever it is that you are saving, make sure it is stored away in a separate account where you will be less likely to touch it.

Map out your essential spending for the month

 

Ever looked back onto your monthly credit card statement and wondered, what on earth did you spend to max out your card?

Well, the next step is to work out what are the essential outgoing costs that you need to spend.  These are usually fixed costs (such as rent, bills, mortgages, utilities or insurance) but could also be variable costs (such as fuel, groceries, transport etc).  Most of the time, knowing your fixed spendings will quickly gauge your monthly disposable income.  As for your variable costs, it is ok to have indicative figures and fine tune them as time progresses.

When working on this list, its a good idea to also check how much of your essential spendings are really “essential”.  As a rule of thumb, 50% of your income should be spent here on living expenses.

Put some aside for recreation spending

Of course in this day and age, there is no way we will get away without going out, eating out or hanging out with friends, and it is important we set aside some cash for this exactly.  This section gives you opportunities to allocate certain amounts each month for eating out, going out, shopping, coffee etc and will test you on how well you can stay within these limits.  You can make this as flexible as you want or as tight as you want, it all comes down to how quickly you want to achieve your goals and how much you are willing to sacrifice.

As a rule of thumb no more than 30% of your income should be spend in this section.

Disposable income

After deducting your 20% savings, ~50% living expenses and ~30% of lifestyle expenses, you are left with what is left and that is your disposable income.  Income that you can either choose to spend or choose to save.

Again, in my situation, what ever is left at the end of the month, I will transfer this into the long term savings account to help with reaching my savings goals quicker.  Some people might choose to invest this disposable income into either shares or bonds (requires more research and planning) or others will set this aside for a couple of month till they have enough for ticking off a short term goal.  What ever you choose to do with it, just makes sure it adds value to your life!

Extra tips for budgeting

  • Budget for a month or two, but try to forward plan for 12 month.  This way you will see what your predicted savings will be at the end (gives you extra motivation) but also forward planning helps with working around any unexpected spendings throughout the year which you might have not budgeted for
  • Periodically review your past monthly spendings and all living and lifestyle expenses.  Try to find ways or alternatives which may saving you money each month.
  • Find an online savings account which offers high interest levels for long term savings
  • Close off credit card and only keep one or two (as emergency).  Having too many credits cards will only tempt you to spend more!
  • Talk to friends who have successfully achieved their financial goals and learn from them what they did to achieve their goals!

 

Good luck!

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