Budgeting for young adults doesn't have to be complicated. Review the benefits of saving early and tips for budgeting in your 20s below.
See the Benefits of Saving Early
Saving early can have significant benefits for your long-term financial health, such as:
- More time for your money to grow: The earlier you start saving, the more time your money has to grow. Over time, the interest or investment returns on your savings can earn interest, leading to exponential growth.
- Flexibility: By starting to save early, you have more flexibility to adjust your savings goals and strategies. For example, if you experience a setback or unexpected expense, you can adjust your savings plan without sacrificing your long-term goals.
- Retirement security: Saving early can help ensure you have a comfortable retirement. By starting early and consistently saving, you can build up a sizable nest egg that can provide financial security in retirement.
- Peace of mind: Finally, saving early can provide peace of mind, knowing that you're taking control of your financial future and setting yourself up for long-term success.
How to Budget in Your 20s
Budgeting in your 20s is important for achieving your financial goals and building a solid foundation for your future. Here are some tips to help you get started:
- Start with your monthly income: Start by tracking your income. The amount of money you earn each month affects how much you're able to save.
- List recurring expenses: Keep track of how much you spend on rent, utilities, groceries, transportation, entertainment and other monthly expenses.
- List one-off expenses: Include the expenses you pay once in a while, such as lump sum payments for car insurance.
- Figure out your average monthly spending: Add your total monthly expenses to determine the average amount you spend.
- Define how much you want to save: Determine your short-term and long-term savings goals to keep you on track.
- Continue to adjust your budget every month: Review your budget regularly. Adjust it as necessary to reflect changes in your income or expenses.
More Budgeting Tips
Follow the tips below to learn more about how to create a budget.
Know the Difference Between Gross and Net Income
The difference between gross and net income is important because it affects your take-home pay and the amount of money you have available to spend or save. Understanding your gross and net income can also help you make decisions about things like retirement contributions, tax planning and budgeting. Here are the differences:
- Gross income: Gross income refers to the total amount of income you earn before any deductions or taxes are taken out. It includes all sources of income, such as wages, salaries, bonuses, tips and investment income.
- Net income: Net income refers to the amount of income you take home after all deductions and taxes have been taken out. This includes deductions for things like Social Security, Medicare, federal and state income taxes, and any pre-tax contributions to retirement accounts.
Figure Out How Much Rent You Can Afford
To figure out how much rent you can afford, follow the steps below:
- Determine your monthly income: Start by calculating your monthly income. This includes your salary and any additional income you may receive.
- Calculate your monthly expenses: Calculate your monthly expenses, including utilities, groceries, transportation and entertainment.
- Determine your debt-to-income ratio: Your debt-to-income ratio refers to the percentage of monthly income that goes toward paying off debt. Debt may include credit card payments, student loans and car payments.
- Adjust your budget: Based on your income and expenses, adjust your budget to determine how much you can afford to spend on rent each month. If your budget is tight, consider looking for roommates or a less expensive rental.
Don't Forget About Loans
A loan may sometimes be a useful tool to help you manage your finances. Here are some ways you can use loans for budgeting:
- Consolidate high-interest debt: If you have high-interest debts like credit card debt or personal loans, consolidating them into a single loan with a lower interest rate can help you simplify finances and save on interest payments. This can make it easier to manage your debt and create a more structured repayment plan.
- Cover unexpected expenses: If you have an unexpected expense, such as a medical bill or car repair, taking out a personal loan can help you cover the cost without having to dip into your savings or emergency fund. Make sure to consider the interest rate and repayment terms before borrowing.
- Finance a big purchase: If you're planning to make a big purchase, such as a car, taking out a loan can help you spread out the cost over time and make it more manageable in your budget.
Budget for the Unexpected
Budgeting for the unexpected is an important part of any financial plan. Here are some steps you can take to prepare for unexpected expenses:
- Build an emergency fund: Set aside some money each month into an emergency fund that you can use to cover unexpected expenses. We recommend having three to six months' worth of your monthly living expenses saved up.
- Create a sinking fund: A sinking fund is a savings account that you use to save money for specific, anticipated expenses. For example, if you know you'll need a new car in a few years, you can start saving for it now. When you set money aside each month, you can avoid the stress of having to come up with a large amount of money all at once.
- Budget for irregular expenses: Make a list of irregular expenses that you know you'll have throughout the year, such as car registration fees, insurance premiums and annual subscriptions. Divide the cost of these expenses by 12 and set aside that amount each month in a separate savings account.
- Consider insurance: Insurance can help protect you from unexpected expenses, such as medical bills or home repairs. Make sure you have adequate coverage for your needs and review your policies regularly.
Don't Let Spending Get Out of Control
If you find that your spending is getting out of control, there are several steps you can take to get back on track:
- Track your spending: Start by tracking your expenses for a few weeks or a month to see where your money is going. You can use a spreadsheet, notebook or budgeting app to keep track of your spending.
- Cut back on nonessential expenses: Look for areas where you can cut back on expenses, such as eating out or subscriptions you no longer use. Try to find ways to reduce your expenses without sacrificing too much.
- Use cash: Use cash rather than credit or debit cards to keep track of your spending and make you more aware of how much you're spending.
- Set financial goals: Setting financial goals can help you stay motivated and focused on your budget. Whether it's paying off debt, saving for a down payment on a home or building an emergency fund, having a goal in mind can help you stay on track.
- Avoid impulse purchases: Before making a purchase, ask yourself if it's something you really need or if it's an impulse purchase. If it's not something you need, wait a day or two before making the purchase to see if you still want it.
Build Your Credit
Building your credit is an important part of budgeting and managing your finances. A good credit score can help you qualify for loans and credit cards with better interest rates and terms. Here are some tips for building your credit:
- Pay bills on time: Payment history is one of the key factors in calculating your credit score. Try to ensure you pay your bills on time.
- Keep credit utilization low: Your credit utilization on your credit report refers to the percentage of credit available that you're using. To improve your credit score, try to keep your credit utilization below 30%. For example, if you have a credit card with a $1,000 limit, try to keep your balance below $300.
- Monitor your credit report: Check your credit report regularly to make sure there are no errors or fraudulent accounts. You can get a free copy of your credit report from each of the three credit bureaus once per year.
- Consider a secured credit card: If you're just starting to build your credit, a secured credit card can be a good option. With a secured card, you'll need to put down a deposit that will serve as your credit limit. Pay your balance in full each month to avoid interest charges.
- Become an authorized user: If you have a family member or friend with good credit, ask if they can add you as an authorized user on one of their credit cards. As an authorized user, you'll be able to build credit without having to apply for your own credit card.
Learn More About AAA's Financial Services
At AAA Central Penn, we offer services for drivers like roadside assistance, insurance and auto loans. We also provide additional benefits for members, including discounts on travel and shopping and continuing education for drivers. Learn more about our financial services today.
