The Young Bachelor’s Guide to Budgeting

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I was recently visiting a 21 year-old friend, relatively new to the self-sufficient lifestyle, when I noticed him making terrible financial mistakes: spending his money before allotting the necessary funds to bills, living paycheck to paycheck, not withholding any funds for emergencies, and having assets that he could not afford the stamp on. What was he doing? Then I realized that what I had thought was just plain well-liked sense, may not be so common.

When I moved out of my parent’s house at 17, I immediately did what was necessary: got a job, got an apartment, called utility companies, and paid the bills. But after the experience with my friend, I realized that many young people today have not been sat down by a parent or teacher where they listened about how to budget their money and pay their bills. They simply lack the knowledge to pull off self-sufficiency.

Most young bachelors, those fresh out of their parents’ house, are likely working their first genuine job and learning the financial ropes. However, the learning curve may not be so great: according to Laura Bruce for bankrate.com (in this article) the national average savings rate was negative 0.5% in 2005. This indicates that people are spending more money than they make in a year and are putting nothing back for a rainy day. Furthermore, between 1992-2001, the average young adult increased his credit card debt by 55%, totaling $4,088, according to a original report from Demos-USA “Generation Broke, The Growth of Debt Among Young Americans,” by Tama Draut and Javier Silva. Retain in mind that this data ended in 2001, so you can imagine that the debt has risen even more during the last few years. More disturbingly, young adults are now the second most likely group to file for bankruptcy (only second to the 35-44 age bracket) according to statistical data compiled here. Using the information from this quick guide, you should be able to stave off common financial pitfalls and begin building for your future. Below are two basic budgeting strategies that are simple for young people to exhaust to help them through these early years.

The Envelope Method

This is probably the oldest method used with budgeting. The idea is to allot a certain amount of money to each line on your budget. Once the money is out, you’re out. You have to wait for your next paycheck.

How to do it: First, write down everything that you spend money on and exactly how much you spend on each item. This includes bills, rent, groceries, toiletries, car payment, gasoline for your vehicle, laundry mat charges, entertainment expenses, everything. If you notice that you have more bills than you have money to pay for them, you’ll need to perform some immediate changes. You may have to downgrade to a smaller apartment, take up a roommate, or work more hours. You may determine that you can’t afford your Camaro and must pass the note over to your parents while you rep a clunker. Many a young person has had to live through it. The goal is to have more money left over after all of your expenses are taken care of. Now it’s time for the sorting process.

If you have a checking account this process is simplified: objective pay your bills electronically and then you only have to allot cash for the items left over. Now mark an envelope with each line from your budget: one should say “gas,” another “groceries,” and another “entertainment” until all of your expenses have their own individual envelope. Be sure you put the exact amount of money that you will need for each expense in the appropriate envelope. For example, if you figure that you will need $30 for gas to make it to work for a week, attach $30 in the envelope marked “gas.”

Now the difficult part is demonstrating discipline. Once you have spent all of your entertainment funds, you can’t just dip into your grocery envelope. Then you wouldn’t be able to eat! You are finished with going out until you regain your next paycheck and then you must achieve the correct amount of money in the envelopes again. Continue this process each month. Feel free to adjust figures as necessary. If you find out it only takes $20 for gas each week and it costs $40 instead of $30 for entertainment, adjust your envelopes so that you take $10 out of your gas fund and put it in your entertainment fund. However, only capture money out if you don’t actually need it for the original expense. Also, only do this when you receive your paycheck, rather than a desperate justification for using too much money on one category after the fact.

The Calendar Method

This is also a very simple method that has been used for years, prior to the advent of complicated software programs that budget your money. The concept here is to list your bills on a monthly calendar in order to determine when you will have the money to pay them. One goal should always be to pay your bills as early as possible to avoid unnecessary late fees. Look at the example below. You build $300 a week.

Name of bill

Payment amount

Due date

Electric

100

October 30

Car payment

250

October 7

Rent

300

October 31

Car insurance

140

October 14

Groceries

120 (30 a week)

Weekly

Toiletries

20

Once a month

Entertainment

120 (30 a week)

Weekly

Gas

120 (30 a week)

Weekly

Based on this information above, your monthly calendar might look like this:

Sunday

Monday

Tuesday

Wednesday

Thursday

Friday

Saturday

1

2

Payday

3

Car payment

$250

Gas $30

4

5

6

7

8

9

Payday

10

Car insurance

$140

Groceries $60

(2 weeks)

Entertainment $60 (2 weeks)

Gas $30

11

12

13

14

15

16

Payday

17

Toiletries $20

Gas $30

Entertainment $60 (2 weeks)

18

19

20

21

22

23

Payday

24

Electric $100

Groceries $60

(2 weeks)

Gas $60 (keeping 30 for next week)

25

26

27

28

29

30

Payday

31

Rent $300

Quick strategy recap:

1. Notice how some of the bills were paid “early” in this example. The electric bill was not due until the 30^th and your check is on the 30^th, so you could have paid it then, right? Wrong! Your rent was also due on the 30^th so you would not have had enough money to pay both bills so you would have wound up getting behind and trying to play catch up next month if you did not properly plan for paying your bills on time.
2. Some weeks you had more expensive bills (car payment, rent, etc.) so on the other weeks, you tried to pay off the smaller budget items.
3. You also stock piled money for when you wouldn’t have enough money for principal items during the week. Notice how on the 24^th you kept extra money for September 1^st’s week’s worth of gas since your rent exhausted your weekly income.
4. Notice how you did not pay any late fees since all of your bills were paid on time. It might seem petty, but those charges can really add up, especially when faced against an already tight budget.

A Couple of Expeditiously Notes

You can use one of these methods, both, or neither. The idea is to effect a positive relationship with money while you are young so that you can better control it later on in life when you have bigger expenses. If you can develop the discipline now to only exhaust money on what you can actually afford, you will have a very profitable future.

The one thing that you have on your side at this age is time. You can either spend that time digging yourself out of debt for years to near, or you can exhaust it saving up for a better future. In this example, the young person only had $30 left over at the kill of the month. Hopefully you have more. But either way, whether you are depositing $20 a week or $200 a week into a savings account, eventually the money will add up. Be sure that you have some leeway in your budget for making this contribution towards an emergency savings memoir so that when something major and unexpected occurs, you will have the ability to take care of it on your own. Keep in mind when financial advisers say, “Pay yourself first,” they are talking about putting money away in savings before paying creditors, not buying the latest PS3 game.

Also, think heavily about contributing to a 401K or other workplace retirement legend. It will be a lot easier to have payments directly deducted from your weekly paycheck now while you are young and have limited expenses than when you have children to support and a hefty mortgage to worry about. The small financial contributions you make now can add up to make a huge contrast later on. Right now stock prices are at their lows so each dollar that you spend today will buy more stocks than it will in the future when the markets go back up. Remember to live large, but live responsibly.