Graduating from college is an exciting milestone, but it can also be a time filled with fear and anxiety. After all, students are now responsible for their finances. Fresh graduates often worry about how soon they will achieve financial independence, which is something they expect to do by age 22. However, CNBC reports that only about 24% of graduates earned an annual income 150% above the federal poverty level — the marker of financial independence. This is a significant drop from the 1980s' 32% rate. Learning how to manage your finances is key to reaching this goal, and one skill you will need is budgeting. This can help you stay on top of your money until you can consider yourself, more or less, completely self-sufficient.
How to Create a Post-College Budget
The objective of budgeting is to provide a systematic way to control your finances within a specified time frame. For instance, if you’re 22 and you want to be financially independent by 25, then how much you spend and save should be in line with the three years you have to complete your goal. Getting a good start on your savings post-college will also be crucial to your financial stability later on. Here’s how to create your budget after graduating:
1. Determine your monthly income
Start by figuring out how much money you’re taking home every month. Factor in all your income streams and then calculate how much you have after tax, social security, and insurance deductions. You will see this amount reflected on your payslips or earning statements from your employer.
2. Account for your expenses
Once you have determined how much money you are earning, now you should find out how much you are spending. There will be two types of expenses you will be dealing with: fixed and variable. The first recur in regular intervals with fixed amounts. Variable expenses can change depending on when you decide to spend on them. Some examples of fixed expenses include your rent or mortgage, utility bills, and minimum debt repayments. Eating at restaurants and spending on entertainment or hobbies are examples of variable expenses. It also helps to categorize your expenses during this step by the level of necessity.
Once you’ve subtracted the necessary expenses from your income, you can determine how much you have left for savings and optional expenses. However, if your expenses outweigh your income, then you need to determine where you can cut your spending. This is where budgeting becomes useful. NerdWallet explains the 50/30/20 approach as a good starting point for beginners. In this budgeting system, 50% of your income should be allotted to necessities, such as rent, minimum loan payments, and groceries. You can use 30% for whatever you want, but 20% should be dedicated to savings and extra payments on high-interest debt.
4. Have a support system
Sticking to your budget can be challenging, and you may not always commit to the 50/30/20 system. It’s easy to feel flush with extra money once you start earning, but the last thing you want is to be trapped in debt. In an interview with Petal Card, young professional Florrie describes how she struggled with an online shopping habit. After confessing to a couple of friends that she couldn’t afford to go on a group holiday, they admitted to being in similar situations. Together, they try to live more frugal lives and support each other when temptation arises. Having a support system will hold you accountable to someone else, and this can motivate the development of better spending and saving habits.
Here at the DoughMain Financial Literacy Foundation we asked the question - ‘Will The Next Generation of Adults Reach Financial Independence?’ By re-envisioning social and personal priorities differently and committing to one’s financial goals, we believe you can.