Becoming financially independent is one of the final steps to becoming a functioning adult. In college, you probably didn’t have much of a budget. Your parents probably took care of many of your expenses. But adults need to manage their own money. If you don’t have a budget, you could face a serious financial problem even though you are making more money than ever before.
Think about your budget as having the following components.
- Income received
- Deductions from your paycheck (i.e. money that you never see)
- Mandatory expenses
- Optional expenses
- Capital purchases
Let’s look at income received. You will probably earn a fixed salary so this amount will be the same from paycheck to paycheck. You will probably be paid every two weeks.
Now what deductions are you likely to have?
- Federal Income Taxes – you will fill out a W-4 tax withholding document when you go to work. This will determine how much taxes will be withheld from your paycheck. (See the topic: Thinking About Your Federal Income Taxes)
- State Income Taxes – most states also have a state income tax that will be withdrawn from your paycheck.
- Local Taxes – Some communities have a local tax. Some of these are called income taxes, others are called user fees.
- Social Security – This deduction will be 4.2% of your wages
- Medicare – This deduction is 1.45% of your wages
- Health Insurance – you will have a deduction to cover the health insurance plan you select. You have some say in how much this will be. See the topic: Evaluating Your Health Care Options.
- Retirement contributions – This represents the money you decide to put away for your later years. You have some say in how much this will be.
- Other deductions – these represent optional deductions for such things as dental/optical coverage, a health savings account, life insurance, etc.
This seems like a lot and it will be shocking to you to see how little of your paycheck you actually take home.
The next category on your budget is those expenses that are required. These include
- Housing expenses – rent or mortgage payments. These expenses also include utilities.
- Food – these expenses are obvious but it may be good to separate food that you fix at home and food that you buy at restaurants.
- Transportation – these expenses include car payments, insurance, public transportation costs, gasoline, and car maintenance.
- Student loan payments – these are monthly loan repayments for debt incurred for college. See the topic: Paying Off Your Student Loan Debt for more information
- Other loan expenses – these are loan repayments for capital purchases such as furniture, appliances, etc.
- Insurance – these expenses include life insurance, theft insurance, or related monthly costs
- Credit card interest – these expenses are monthly obligations for credit purchases you have made.
The next category is for expenses that you don’t have to incur. These costs include
- Entertainment – expenses for going out, recreation dues, vacations, etc.
- Clothes – some clothes may be considered as required expense but clothes should probably be better thought of as optional
- Non-Capital purchases – those expenses include music downloads, video purchases, computer games, and other small dollar purchases
- Contributions – these expenses include donations to various charities. If you give to the church you should consider this as required even though it’s your choice.
- Miscellaneous – you would be wise to include a small amount of money for costs that don’t fit any other category
Capital purchases represent major items you need to buy. In most cases, you will want to put aside money for these purchases rather than going into debt for all of these. You want to separate these since they are budget busters.
The first category is savings. You will want to budget savings each month because if you don’t, you won’t put money aside for savings.
You may want to use the template in the attachment to construct your budget. Don’t be discouraged if you need to change your budget because it doesn’t balance originally.