Budget Calculator: First Year Out Of College
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Drawing Up Your First Budget
Ok, real talk -- you probably spend too much money, even if you're part of the one in four surveyed millennials who thinks they're a "highly disciplined" financial planner.
But budgets are tricksy, and it's rare to find one that fits a recent college grad instead of a well-established family -- and individual circumstances and priorities vary fairly broadly even within the generation.
In a walkable city, your transportation costs will be lower while your rent is higher, and with no student loan debt you've got more flexibility for saving and investing.
It's a tradeoff -- hence, you have to trade something. If you have a devastatingly expensive gaming habit, then you might sacrifice a few meals out for high-speed internet and a revolving door of video games. Sometimes, you might need to live under a staircase in order to afford that Nimbus 2000.
But here are two other statistics about millennials financial planning from that same study: one in three says they spend money budgeted for other things on themselves and one quarter says financial anxiety makes them bill weekly or monthly.
And there's simply no need for that -- check out our instant college grad budget to get your money and mind right.
The 50/20/30 rule... or the 60/20/20 rule... Ok rules are meant to be broken
Our budget is more or less a variation on the tried-and-true 50/20/30 rule that allows for the flexibility and priorities that a recent college graduate has. If you're not familiar with how it works, it goes a little something like this:
- Fixed Costs -- These costs are predictable and won't change, unless you cancel them. We're talking subscriptions to Netflix, rent, gym memberships, insurance, and anything else that you can rely on hitting your bank account on a regular basis.
- Financial Goals -- Put at least 20 percent of your take home pay toward important loan payments, retirement, or building your financial security
- Flexible Spending -- Keep your flex spending that changes from month to month (and your fun money) to no more than 30 percent of your take home cash. This is stuff like dining out, gas, and shopping that you can't always set an exact budget for.
The problem with this approach is its rigidity and the fact that it doesn't address the concerns that recent college graduates have, like crippling student loan debt.
After all, how much sense does it really make to put your money into a money market account yielding a 1.5 percent return when you've got a private loan accruing at 12 percent? Or to invest in your 401k when your company only matches two percent?
Actually, you should absolutely always do that because it's free money, but you get the point.
This budget is a general guideline for the average college graduate, while acknowledging that there are no unbreakable rules -- you're allowed to tweak the ratios, as long as you keep in mind that something's got to give somewhere.
Try to get your money right -- 20 percent
This is the area of our budget that differs the most from the usual ones you'll find. Despite the junk older folks like to talk about those damned irresponsible millennials with their emojis and snap tweets, we're actually a fairly fiscally responsible bunch.
Two things you need to do quickly
Pay off your damn credit cards and get some emergency savings.
Credit cards are not free money -- at least not for you. Banks absolutely love it when you pay them off and immediately rack them back up again, paying those fees every month. But paying your credit cards down has two other benefits: you'll shoot your credit score back up by keeping your utilized credit under 35 percent and you'll simultaneously have an emergency fund to dip into.
And speaking of which, savings. It's tempting to treat yo'self when you get your first few months of paychecks, but you need to look at how much you need to spend each month to get by and save enough for at least two month's worth.
The recommendation is to take ten percent of your take home and use it for savings.
Take this budget, subtract your fun money and savings costs from your take home pay, then multiply it by three. That's how much you should have to get yourself through three months of no income.
Loans and retirement
So after you've paid down your credit cards -- and keep them down -- you should look to the future.
As far as your retirement is concerned, it's simple: whatever your employer matches in a 401k, you should put that amount into it.
I'm not going to go into the intricacies of how it all works, but that money essentially comes out of your check before you see it, gets doubled by your employer, and it's pre-tax, so you basically earn that percentage back on it if you wait until you retire to touch it. It's free money, so you'd be a fool to ignore it.
Now, I know there are a ton of really cool apps out there that let you invest with ETFs and whatnot. Hold off until you pay down your loans, because I can pretty much guarantee you that you're not going to make more money saving or investing for retirement than you will paying down your student loan.
The average student leaves college with about $25,000 in student loan debt, and assuming a 6.8 percent interest rate on a 10-year repayment plan, the monthly loan payment is about $280 -- build your minimum payment into your budget, and after you save up a nest-egg and pay off your credit cards, cut take half of the amount you.
Your savings strategy in a nutshell:
- Pay into your 401k up to your employer's match
- Take ten percent of your take home pay for financial goals
- Pay down your credit card
- Save enough for a few months
- Of that original ten percent, put half of it into savings and the rest into your student loan
Housing costs -- less than 30 percent
We can all agree that the rent is, generally speaking, too damn high -- but unless you live in San Francisco, it's manageable if you budget for it.
The key is to make sure that your rent doesn't make up an excessively large portion of your budget. And as we mentioned before, some cities may require a larger portion of your pay, but that means you need to make sacrifices elsewhere within your fixed needs section.
Aim to keep rent under a quarter of your take home pay -- but in some cases you won't have a choice, as many landlords won't even accept applications for people whose gross monthly income isn't at least a third of the monthly rent.
So why do we say to keep your rent under 25 percent of your income? It's sort of arbitrary, but the government uses the 30 percent mark for public housing programs -- households who spend more of than 30 percent of their income on combined housing costs are considered "cost-burdened".
And if you live in San Francisco, or at least spend 50 percent or more of your pay on housing costs, you're classified as severely cost-burdened households.
But if you do live in one of those high-rent areas
It's not unheard of for landlords in places like NYC and Seattle to insist that your gross salary is forty times the monthly rent -- as in, you need to get a job offer with a $120,000 salary to afford a $3,000 a month apartment.
But if you find yourself in a high rent city with a gracious enough landlord who will let you pay half of the money you make all week just to sleep and enjoy the airy space with a nice view on the weekends, you're going to have to give up something.
We're saying that you should put 50 percent to necessities -- and the fact of the matter is that you might have to pull some money from your discretionary flexible spending in order to live in a part of the city that you love, even if it doesn't make the most sense financially.
Food budget -- less than 15 percent
Our calculator uses a relatively conservative monthly grocery cost of $250 per person from the USDA's $200 to $400 per person grocery range -- unless you live in an area with a particularly high cost of living, this should be at least enough to keep you functional, if not with the boujie yogurts and avocados you may have grown accustomed to on your parents' dime.
We include groceries in the flexible spending portion of our calculator -- even though it's obviously a necessary part of the budget, you'll vary how you spend the money and it's an area where you can cut back if you see your other expenses creeping higher than you planned.
This also gives you the option to dine out more or less. Just to let you know where you Chipotle consumption costs put you, Bureau of Labor Statistics (BLS), show the average person spending about 12.5 percent of their take home money on food each month, with the average person spending about 60 percent of their food budget on groceries and the remaining 40 percent on dining out.
Incidentally, the average American spends about 1 percent of their money on alcohol. So budget for $150 dining out, and add to it from the nebulous entertainment fund or rollover cash you have.
Live off of baked potatoes and potato vodka if you choose, just keep it all under 15 percent.
Transportation budget -- less than 20 percent
You should aim to spend absolutely no more than 20 percent of your take home pay on the total costs of transportation, with about a quarter of that going to gas, insurance, and maintenance. Obviously, how you choose to spend that money is going to depend on where you live and your individual situation as far as a car is concerned. The needs for a person who drives a truck an hour each way in the Midwest is going to vary drastically from someone who relies mostly on public transportation in the Northeast, where about a quarter of people use public transit.
Also, someone who needs to replace a rundown car they inherited from their parents in high school might need to buy a new one, but keep in mind that according to Edmunds.com the average monthly payment on a new vehicle is $479.
Going back to our 15 percent of your take home pay earmarked for the car note, that lines up with someone making the average college graduate salary -- but that savings of $5,748 over the course of a year is crucial might make it worth postponing that major purchase.
A final note on how to view your budget
If nothing else, a budget forces honest upon you -- it's too easy to just pull out a card, if you actually watch where it goes then you'll be less likely to blow it.
This 50/20/30 guideline can help you not only figure out how much you may want to allocate to each area every month; it can also help you determine the order in which your money can be allocated.
It'll definitely vary from person to person, and even month to month -- just remember that spending money is a form of communication, and how you spend it speaks a lot about what you value.
- 30 to 35 percent for housing/utilities
- 10 to 20 percent for food
- 10 to 20 percent for transportation
- 5 to 10 percent for savings
- 5 to 10 percent for debt repayment
- The remainder for discretionary spending
- Take 10 percent off the top for savings.
- Keep consumer debt to 20 percent or less of take-home income.
- Keep all debt to 36 percent of gross -- before tax -- income.
In a new study, life insurer and financial services provider Northwestern Mutual found that 45% of Americans that have debt spend "up to half of their monthly income on debt repayment." Those are the true debt slaves.
Excluding mortgage debt, American carry an average debt of $37,000. Of them, 47% carry $25,000 or more, and more than 10% carry $100,000 or more in debt, excluding mortgage debt.
Most of them expect to get out of debt before they die, but 14% expect to be in debt "for the rest of their lives."