The importance of adapting a habit of budgeting and saving in your 20s can not be emphasized enough. Some of you are preparing for life after college. Others of you have already embarked on that journey and have begun to realize the importance of managing your money.
First, you will need to establish a budget. Become familiar with your monthly expenses. Write them down. Subtract your expenses from your income. What’s left over, assuming you are not over spending, is the only money you have for entertainment, date night, shopping, etc. With this being said, take a second look at your list of expenses. Any expense that can be classified as an entertainment or luxury expense does not belong on your list of monthly expenses. Monthly expenses are those that you can not live without. Ladies, hair and nails are not life or death necessities. And guys, be creative, she will like you the same.
Now that you know what your expenses are, let’s identify ways to scale-back on those expenses to find extra cash. Look at in one of two ways. One, if you cut-back on your monthly expenses you’ll have more money each month for entertainment and luxury expenses. Two, you can cut-back on your expenses and contribute to a savings plan, which we will discuss later. Either way, you are proactively managing your money and in charge of your financial house.
Practical ways to start saving:
Save on textbook costs:
– Buy used textbooks (visit www.Chegg.com)
– Rent textbook
– Sell textbooks back to vendors when the semester ends
Find a roommate or two
– Rent out your apartment for the summer while you are away on vacation and make a profit, or stay in town at a friend’s or with a relative (search online for trusted companies, e.g. NYHabitat.com)
Stop shopping for a while
Lower cable expenses:
– Cancel premium channels
– Switch to basic cable
– Shop other providers for the best deal
– Switch to Netflix for $7.99 a month and watch unlimited movies with your game console or other devices
Stop eating out:
– Grocery shop at discount stores (Walmart, Dollar General, etc.)
– Join Costco or Sam’s Club and buy in bulk (with a friend if necessary)
– Use coupons (www. couponsuzy.com)
Cut cell phone rates:
– Lower monthly rates by switching to a different plan
– Get rid of the iPhone and save $30 a month on data package
– Switch carriers (T-Mobile, Boost, and Virgin Mobile all offer low unlimited text amp; talk)
– Cancel home phone service
Cancel gym memberships:
– Join a local team
– Borrow a friend’s or neighbor’s bike, rackets, etc.
– Try local yoga, dance, and karate centers. They allow you to pay only for the time you use the facility and offer discount packages
– Check out the YMCA
Take public transportation:
– Save on gas
– Eliminate cab fare
– Get rid of parking expenses
Lower car insurance premiums:
– Shop for the best rate
– Pay up front and save 10-15%
– Car owners can downgrade to liability coverage and keep the car parked and take public transportation (you will save on gas, insurance and parking)
If you have identified two or three ways to cut-back on your monthly spending, you have the potential to save hundreds each month. The general rule of thumb is NOT to spend more than 65-70% of your income on living expenses, 15% on entertainment and extra expenses, and put 15% towards saving and retirement. Divide your income into these three categories. Later, we will discuss opening bank accounts to reserve your money, but for now, you can use envelopes. Write “expenses”, “savings” and “entertainment” on the fronts of these envelopes and set them aside. When you receive income, decide what percentage of that income goes into each of these envelopes. The money in each envelope is the money you have to support your lifestyle. If there is not enough money in “living expenses” to cover your rent, utilities, food, transportation, etc., you are living above your means and will need to consider adjusting your lifestyle.
Assuming you have established a budget, identified ways to scale-back, are allocating your income to categories, and are living within your means, it’s time to establish accounts where you can safely put your money aside. It is a good idea to use your checking account for reoccurring monthly expenses and a separate savings account for short-term savings. Open a brokerage account for long-term savings. Link your checking and savings accounts to avoid overdraft penalties. Set-up automated bill pay to avoid late fees and mobile alerts to let you know when balances are low. Set-up an automatic savings transfer from your checking account. And avoid ATM fees. By taking these steps you can shift your focus to ensuring you have regular income and are consistently making deposits into your checking account.
The wheels of financial security are turning, but the buck does not stop there. Save at least 3 months living expenses and keep this money in your short-term savings account. Schedule a weekly, bi-weekly, monthly, or quarterly automatic transfer from your savings account to your brokerage account. Let these funds accumulate while you do your homework. Research Certificates of Deposit (CDs), Individual Retirement Accounts (IRA), and Money Market accounts. Speak to a representative at your financial institution for advice on which type(s) of account(s) is right for you and start investing in your retirement.
In order to achieve financial security, you must first learn to live by a budget. It is important to establish the categories referenced above and allocate percentages of your income (daily, weekly, bi-weekly, or monthly) each time you are paid. It is equally important that you do not co-mingle funds or exceed the amounts allocated to each category. It does not matter who you are or what your current situation is, it is important to establish a habit of planning for expenses and saving. These are the first steps to a promising financial future.