May 292014
 

In last week’s Thursdays are for Thinking Out Loud post, I mentioned that I am following a new budget to help me keep track of my finances. Fabio put the budget together for me months ago, and although I procrastinated for a while before taking advantage of it, I now feel much more at ease about my money and am so glad I decided to start following it.

A lot of you expressed interest in hearing more about the budget and Fabio’s finance tips, so I wrangled him into sharing a few of them with us today. Although neither of us are experts in this field, Fabio was an economics major in college, and has always had a passion for learning about money and investments.  Either way, he has a lot of good tips to share and I hope this post will be helpful for you! I’ll be back with your regularly-scheduled fitness/healthy lifestyle update tomorrow, so feel free to skip this post if money bores you to tears.

Ready? Grab your notebook and a pen because there’s a lot of information in this post!

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1. Know how much you make and how much you spend. Knowledge is power for just about everything in life, and it’s no different when dealing with your finances. Before you can begin creating a budget for yourself, you have to know how much money is coming in and going out. It’s sort of like watching your calorie intake and expenditure- you have to make sure more money is coming in than going out.

My favorite way for tracking this information is through Mint.com. Mint is a free website and app that allows you to link up your bank account and track your spending. It will show you how much money you spend on each type of expense, and might make you realize that your daily pit stop at Starbucks is making a bigger dent in your wallet than you realized. Use Mint to keep track of how much money you’re making, and how much realistically you’re spending each month.

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2. Set some goals. Once you get a good idea for how much you’re spending, it’s time to do something about it! This is where Fabio had to help me out, because even though I’d been using Mint for a while, I kind of looked at, nodded my head and thought, yep, there goes my money.

According to Fabio, in a perfect world you should allocate your net-income (your post-tax income) as follows:

  • 50-60% living expenses
  • 20% personal expenses
  • 20-30% savings

Now, let’s break that down a little.

Living expenses include everything from rent, to gas, to groceries, to loan payments, and bills. Fabio says your rent/mortgage payments should be at or around 40% of your net income, with the other 10-20% going toward your bills (obviously this will be different for people who have to pay a lot in loans- just make sure to adjust accordingly so you’re still in the 50-60% range). Also make sure to include a 5% safety net for items like car repairs or health expenses.

Personal expenses are all the fun things in life, like going out to dinner, shopping, movies, etc. This one is tough to rein in most of the time, but we’ll get to some strategies for managing this bucket in a minute.

As a 20-something, your savings will initially be used as a rainy day/emergency fund, but eventually you’ll want to use it as your retirement or investment fund. For your emergency fund, you want to work up to saving 6 months’ worth of living expenses. This way, if (God forbid) you lose your job or incur some unaccounted expenses, you’ll have 6 months’ worth of back-up money in the bank. Once you have that saved up, Fabio recommends shifting most if not all of your savings into a 401k or Roth IRA. To figure out which of these options works best for you, you should check with you bank and your employers.

3. Make it happen. Once you know how much you can spend and how much you should be saving each month, it’s important to put that into practice! This can be one of the hardest aspects of balancing a budget because it seems like a lot of work, and can be intimidating.

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The first thing Fabio recommends is creating a different bank account for each bucket (living expenses, personal expenses, and savings). Here’s how I personally manage these expenses:

  • Living expenses: Fabio and I have a joint checking account that we use for rent, gas, groceries, and bills. We use the direct deposit option at our jobs to automatically transfer about 50% of our biweekly paychecks right into that account, and then we set up our bills so they are all automatically paid through that account. We use the debit cards associated with that account to pay for groceries and gas, and try really, really hard not to use it when we go out to dinner together, though if we’re feeling bold we sometimes will do it anyway (phew, talk about wild 😉 lol). Now that everything is set up in there, it’s really easy to use, and I never have to worry about a bill being late or not having enough money for groceries. Having a separate account for these types of expenses is great!
  • Personal expenses: I got Fabio to do the math for me to figure out how much money I am “allowed” to spend on fun stuff each month, because apparently figuring out what 20% of my biweekly paycheck was just too much work for me, haha! (Truthfully, I just didn’t know it was supposed to be 20%). Now that I know how much I can spend on personal expenses each month, I make sure to keep only that much money in my checking account in between pay periods. For example, let’s say I allot $300 toward personal expenses each month. When I get paid, some money goes directly into my living expenses account with Fabio, and the rest goes into my own personal checking account. Every time I get paid, I transfer money out of my checking account and into my savings, so that I only have $300 left in my checking account. I can then spend that $300 on whatever I want, but I have to make it last until my next paycheck. Sometimes I run out before my next paycheck, and then I will use my credit card. The catch is that when I get paid again, I have to use that pay period’s $300 to pay off my credit card right away. I always pay my credit card off in full, and by using the allotted $300 to do it, I make sure I don’t dig in to my savings.
  • Savings: By following the method I just described, my savings account pretty much takes care of itself. I always try not to tap into my savings account at all, but sometimes when a vacation pops up or there’s something expensive I need to buy, I do allow myself to use it. Fabio would probably say to not do this and to use your personal expenses account instead, but I’m just being practical here. You don’t always know when you’re going to need an extra $1,000 ASAP! I also participate in the 401K program at my work, which matches my contribution up to a certain point. I try to contribute as much as I can so I can take advantage of the match program, even if it hurts my paycheck a little to do it.

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Managing your budget might seem really scary at first (holy cow, that was a lot of information) but once it’s all set up it’s really not that difficult. Now that I’m following Fabio’s method, I know how much money I can spend from week to week and definitely start to pull back when I see that I’m getting close to my limit. Before I was just kind of spending willy-nilly and always made sure I had some money to use as a cushion, but my savings account wasn’t really growing. Now it’s in better shape than ever and I finally feel at ease about my finances!

*Just to reiterate, Fabio and I are not financial advisers, and this is just how we prefer to manage our finances*

Question of the day: How do you follow a budget?

 Posted by on May 29, 2014

  4 Responses to “Easy Finance Tips for 20-Somethings”

  1. Love these financial tips, Chelsea! I am a Mint.com user but I’m not the best about following it to the letter. One of my goals is to get better at it, so I might try out Fabio’s method!

  2. These are a few great tips and I think that this will help many people.

  3. (Super late in responding to this) This is awesome! People (especially 20-somethings) handle their money so differently from person-to-person, so I love hearing different ways that people go about it! I’m a firm believer that knowledge is power and you need to figure out what works best for you, so I’ll definitely have to consider using some of these tips and tricks (especially the separate “personal money” bank account) in my own life!

  4. […] took Chelsea’s advice on setting up a budget, per the awesome expertise of her boyfriend Fabio, and created a detailed breakdown of the amount […]

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