You finally have financial independence. You can spend your money on the things you want, and that’s exciting. But with that freedom comes more serious questions, like:
Am I spending too much a month? Am I doing this right? Should I be saving? Do I have to feel guilty every time I buy a fancy cocktail?
Creating a budget helps answer those questions, and more. Believe it or not, giving yourself a financial framework actually grants you more flexibility, more money to spend and fewer anxieties to worry about.
Why you should start budgeting in your 20s
Saving early means earning more out of every dollar
Here’s the idea: When you invest your money early, you don’t just earn interest on that investment, but over time you also earn interest on your interest. The more time you let your investment grow, the more you squeeze out of each dollar.
Here’s a simple example
At 22 years old, Bill invests $200 into a mutual fund that offers a five percent return. He continues investing $200 every month and by the time he turns 65 years old, his investment earns him $363,945.99.
Let’s compare this to George, who follows the same investment plan, but starts at 30 years old. When George turns 65, his investment is only worth $228,365.23. Those eight measly years that Bill had on George helped him earn a whopping $135,580.76 more.
The key is to give your money time to maximize interest. You don’t have to start big. You just have to start.
Budgeting prepares you for future “adulting”
Captain Obvious Quote of the Day: Don’t start saving for a home at the exact time you want to buy a home. You may not be thinking about diapers and home ownership, but you might later on. Starting to save earlier means giving yourself a smaller financial burden when that time comes. It’s also important to learn how to stick to a budget so that you’ll be set for when your finances become a little more complicated.
Afford the lifestyle you want. Now.
Your twenties are the best time to do the things you want to do when you’re still young and free of major responsibilities. With a spending plan, you’d be surprised at how much you can squeeze out of your income.
Tracking your spending helps identify areas for improvement so that you can spend less on things you don’t need and put that money towards something better. Like that sweet trip to Spain you’ve been thinking about.
Go debt-free faster
Get rid of that looming debt anxiety for good. Budgets make it easier to pay off your debt without putting stress on your paycheck. You can check off that list much sooner by making it a routine to save a little bit every month.
Less stress when dealing with unplanned expenses
Life happens. And that means: emergency dental appointments, car problems, a leak in your roof—you get the idea. Budgets help make sure you always have extra funds cached for those unexpected incidents.
You shouldn’t have to waste money on high-interest loans or awkwardly grovel to your parents or friends. No one wants to see that.
How do I start budgeting?
Budgeting is important, but it doesn’t have to be complicated. Get your budget started with these six simple steps.
Figure out your monthly income
Gather all your income sources into one place. How much are you taking home a month after taxes?
- If you get paid every other week: Multiply your paycheck by 2.166
- If you get paid weekly: Multiply your paycheck by 4.333
- If your income fluctuates: You can average several months of income. Just try to be as conservative as possible.
Track and categorize your average monthly spending
Keep it simple. Start with last month’s total expenses. Gather all your bills and receipts and figure out how much you’re actually spending per month.
Break down your spending into categories that make sense for you. For example: Living expenses, transportation, subscriptions (like Spotify or Netflix), groceries, medical, debt payments, entertainment. This helps identify unexpected areas that may be hemorrhaging money.
Set a goal
Getting on the right financial track is a great objective, but it’s important to work towards something concrete. This helps motivate us to be diligent and consistent with our budgeting.
What if I don’t have a goal?
Make one. A great first goal is creating an emergency fund for unplanned expenses.
Some other possible goals:
- Short-term goals: Saving for a trip or a new couch
- Medium-term goals: Saving for a car, becoming debt-free
- Long-term goals: Saving for retirement or paying off your mortgage
Set your financial framework
Start by weighing your expenses against your net monthly income. How much wiggle room do you have? What are your goals? What spending categories can use improvement?
Start setting ideal budget goals for each category. Be honest with yourself and your lifestyle. If you enjoy going out for dinners or drinks with friends, include that in the budget as well.
You can use this simple budget worksheet to keep track of spending.
Overwhelmed yet? That’s okay. There are tons of tools designed to make it easy to create and manage your ideal budget. Later on, we’ll explore some popular ones
Keep in mind that our spending habits and income change. Make sure to adjust your budget accordingly. Also make sure that your budget is actually sustainable. If you’re finding it difficult to stay within that framework, then change it. Be realistic with yourself.
Budgeting resources: What can I use to make budgeting work for me?
Put down that Excel Spreadsheets for Dummies. There are tons of resources for any type of budgeter—whether you want to do it all yourself, or leave it to the professionals. Try as many as you want until you find one that sticks. Remember, it’s all about what works best for you.
The 50-30-20 Budgeting Method
The 50-30-20 Method is a helpful place to start for budgeting newbies. Avoid convoluted spending categories. Simply divide your budget three ways: 50 percent towards living expenses and essentials (i.e. rent, groceries, utilities), 30 percent towards flexible lifestyle spending (i.e. entertainment, eating out, travel) and 20 percent towards your financial goals (i.e. savings, debt payments, investments).
Rather than giving up your social life, the 50-30-20 Rule gives you a whole 30 percent of your budget to spend as you please.
- Budgeting beginners
- People who want budgeting flexibility
The Envelope Method is this: Store your allotted budget in the form of cash inside dedicated envelopes for each spending category. It’s a pretty old school method, but a great option for people who want to set stricter limits for themselves.
- Those who prefer using cash to credit or debit
- People who need more financial boundaries
Bullet journaling has become a really popular way of organizing life and staying on top of tasks and goals. It’s now being used as a budgeting tool, too. Bullet journals are hyper-organized and personalized log books, which are regularly updated by you. Writing down goals or reminders can hold more weight for people than just typing them out or passively relying on an app.
- People who like to physical write down their tasks
- People who want total control of their budgeting
If Mint was a smart phone, it would be an Apple—super easy to use, not much customization, but perfect for those who don’t want to deal with the nitty gritty.
Mint is a financial manager app that syncs perfectly with your banking, credit, and investment accounts to categorize and track your purchases. It also helps create budgets and alerts you when you exceed your budget limit. Plus, it’s free (If you’re okay with some pesky pop-ups).
- The “set it and forget it” types
- People looking for simplicity
You Need a Budget (YNAB)
Like Mint, YNAB is a personal finance management app that syncs with your banking and credit accounts. But unlike Mint, the main focus of YNAB is on creating and readjusting your budget so it works as your needs change. It’s based on these four principles:
- Give every dollar a job
- Embrace your true expenses
- Roll with the punches
- Spend money that’s at least 30 days old
While this service costs $6.99/month, many YNAB devotees swear by it.
- People who want to revolutionize their finances
- People who want a highly involved system that adjusts with your life
It’s the Envelope Method made for the digital world. Assign monthly allowances to different digital envelopes. Mvelopes sets aside your money into these assigned accounts only to be spent on pre-determined items.
Mvelopes also works to better our financial habits—offering helpful learning resources and access to a personal finance trainer. Mvelopes offers a tiered pricing system:
- Mvelopes Basic: $4/month or $40/year
- Mvelopes Plus: $19/month or $190/year
- Mvelopes Complete: $59/month, $149/quarter, or $549/year
- Those who like the envelope method
- People who need more financial boundaries
Like Mint, Wally is a simple app for tracking expenses that’s convenient and easy to use. Unlike Mint, Wally doesn’t sync with your bank accounts. Instead, it offers an easier alternative to manually tracking expenses. Take photos of your receipts and upload them easily to specific spending categories. Wally is 100 percent free.
- People who still want some control in consolidating their finances
- People who don’t want to give away their banking info
PocketGuard is another smart budgeting app. It connects all of your finance accounts, and illustrates your financial information in a highly digestible way.
The app takes your spending habits and income and creates a personalized budget for you. This is also a great tool for identifying areas for improvement. It helps you plan for upcoming expenses and notifies you of unexpected charges or bank fees.
PocketGuard is $3.99/ month for a monthly subscription and $34.99/ year for an annual subscription.
- People who want to optimize their spending
- People who want to visualize their budget in a simple way
How you can use credit cards to budget
Tracking and charting all of your expenses can get overwhelming, but luckily, most credit cards do that for you automatically. Credit cards offer great budgeting resources. They keep track of your expenses on an ongoing basis and organize your spending into different categories. Plus, you can loosen that budget even more by earning rewards on every dollar you spend.
Here are a few of my favorites:
Best cash back rewards card: Discover it® Cash Back
- INTRO OFFER: Discover will match ALL the cash back you've earned at the end of your first year, automatically. There's no signing up. And no limit to how much is matched.
- Earn 5% cash back at different places each quarter like gas stations, grocery stores, restaurants, Amazon.com and more up to the quarterly maximum, each time you activate.
- Plus, earn unlimited 1% cash back on all other purchases - automatically.
- Redeem cash back any amount, any time. Rewards never expire.
- Use your rewards at Amazon.com checkout.
- Receive FREE Social Security number alerts-Discover will monitor thousands of risky websites when you sign up.
- No annual fee.
- See additional Discover it® Cash Back details
|Regular APR||Annual Fee|
|0%||14 months||0%||14 months||14.24% - 25.24% Variable||$0|
Best travel rewards card: Chase Sapphire Preferred® Card
- Earn 50,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening. That's $625 toward travel when you redeem through Chase Ultimate Rewards®
- Chase Sapphire Preferred named "Best Credit Card for Flexible Travel Redemption" - Kiplinger's Personal Finance, June 2018
- 2X points on travel and dining at restaurants worldwide & 1 point per dollar spent on all other purchases.
- No foreign transaction fees
- 1:1 point transfer to leading airline and hotel loyalty programs
- Get 25% more value when you redeem for airfare, hotels, car rentals and cruises through Chase Ultimate Rewards. For example, 50,000 points are worth $625 toward travel
- No blackout dates or travel restrictions - as long as there's a seat on the flight, you can book it through Chase Ultimate Rewards
- See additional Chase Sapphire Preferred® Card details
|Regular APR||Annual Fee|
|N/A||N/A||N/A||N/A||18.24% - 25.24% Variable||$0 Intro for the First Year, then $95|
Best card for pretty good credit: Capital One® QuicksilverOne® Cash Rewards Credit Card
- Earn unlimited 1.5% cash back on every purchase, every day
- Earn cash rewards without signing up for rotating categories
- Get access to a higher credit line after making your first 5 monthly payments on time
- View Capital One® QuicksilverOne® Cash Rewards Credit Card details and how to apply »
Best card for low or no credit: Discover it® Secured
Regular APR Annual Fee N/A N/A 10.99% 6 months 25.24% Variable $0
Single card tracking
A great option for novices and experts alike is to limit your purchases to just one payment source. It comes with many benefits, but can especially be useful if you get flustered trying to manage all your bills, credit cards and debit cards. Instead, you just need to keep track of one card. You also reduce the number of bills you need to think about every month.
As I mentioned, most credit and debit cards have amazing built-in tracking systems that organize your spending into charts. By using just one card, you can use these services as they were intended, without having to consolidate with data from other cards. And if you’re using a credit card as your primary payment method, you’ll earn rewards much quicker.
- People who have trouble managing many different payment methods
- People who want simpler finances
- Rewards-conscious people
This list only skims the surface of the many finance tools designed to help you succeed. With the right framework and the right tools, it’s easy to keep your finances in check. And that means less worrying and more money for the things you want. It’s pretty much a no-brainer. So what are you waiting for?