For the most part young people (ages 18-30) are not too concerned about their future finances nor are many young adults actively planning for retirement. Many young people do not save each month nor do they have a budget. Frankly, the majority of young people do not have smart spending habits thus they end up in major debt or living pay check to pay check. A budget can help to avoid the pitfalls of mismanaging your money.
So how does one start a budget? First, it is important to make a list of all of your living expenses. Living expenses are things such as rent, utilities, water, internet, cable, cell phone, etc… Then make a list of all the other items you spend your money on during the month. Living expenses are difficult to decrease quickly unless you are willing to get rid of cable or change your cell phone plan. However, other expenses such as food, toiletries, clothing, entertainment and miscellaneous expenses are easy to decrease. It is important to take a hard look at these other expenses and see what you can do without. There is a big difference between what you want and what you need; therefore, try to eliminate those expenses that are purely wants and not things you need.
After you have decided this then look at the list see what you spend a lot of money on and see where you can cut those expenses. For example, I noticed that I was spending over $100 a month for internet and cable so I decided to get rid of cable and get Netflix instead. Since I gave up cable, I save $80 a month! In return I put the extra $80 each month into my “rainy day” savings account. Also, I decrease the number of times I go out to eat each month which saves me approximately $100 each month. Lastly, I changed my cell phone plan which saves me $20 each month. After just a few changes to my expenses I save $200 each month…that is $2,400 a year!
The final step in creating a budget is to set a limit on what you will spend each month on expenses that are not living expenses. Set a realistic limit and stick with your limit. Always, have an amount each month that automatically goes into your savings, thus you will not be tempted to spend it.
The goal is to save up at least six months of living expenses and put that into a savings account that is used for emergency purposes only. Also, it is important to have another savings account that you use for unexpected life occurrences such as car repairs or appliance repairs.
The major mistake young people make is that they live outside of their means (that means spending more money than what you make). In reality, if young people would live under their means they will have plenty of money in the future to enjoy the finer things in life. However, if you make it a habit to live outside of your means then you are setting yourself up for disaster in the future. Seriously, no one wants to be 75 years old and having to work not because they want to work but because they are living pay check to pay check with no retirement.