As you toss your graduation cap in the air, it feels like the world is yours for the taking. Finally, you’re free from academia and will hopefully land a job in the next few weeks. Doesn’t a steady paycheck seem like a dream come true after four long years of being on a student budget?
However, the stark differences between your college and career finances can be jarring. Your budget for school is likely to be vastly different from your budget once you’re earning your own money. Whether this is a good or bad difference depends on how well you manage your finances.
To navigate your life after graduation with as little financial stress as possible, you should learn how to budget effectively. As experts in the art of budgeting, we here at Wealth Education Academy give you the following budgeting best practices:
1. Budget based on your post-tax income
Your take home pay is always less than the negotiated salary you and your company agreed upon. This is because income and other taxes are automatically deducted from your salary. So, it only makes sense that you create a budget around the money that remains after your taxes have been deducted. Another great idea is to set aside money from your budget that’s meant to pay for your student loans. You should treat student loans like taxes—a deduction from your income that is non-negotiable. The more diligent you are with paying off your student debts, the faster you’ll reach financial freedom.
2. Don’t spend more than 30% on housing
Housing is likely to be your biggest monthly expense, especially if you live in expensive neighborhoods. This has been the standard that the government has been using since 1981, referring to the maximum amount a household can spend and still have enough left for other expenses. Those who spend more than the standard 30 percent of their income on housing costs are considered “cost-burdened.” If you’re renting, your utility bills should already be included in that 30 percent. If you’re a homeowner, the 30 percent should include homeownership costs like property taxes, mortgage, and maintenance.
3. Save 20% of your salary
You’ll find that in adulthood, there are more things you should be saving for than a Jonas Brothers ticket . First, you must save money for your emergency fund. Finance experts recommend that you have emergency savings that amount to at least six months of living expenses. This will cover you in case you are suddenly laid off, get involved in an accident, or figure in any other unforeseen event that would prevent you from earning a salary. Unfortunately, nearly one in four Americans does not have a rainy day fund at all.
Next, you should save up for your retirement. Yes, you just graduated. But the sooner you begin saving, the more time your money has to grow. For example, you can start putting $3,000 a year for your retirement when you’re 25. Do this for 10 years straight and then stop completely. Assuming there’s a 7 percent annual return, your initial $30,000 investment will have grown to about $338,000 by the time you’re 65 even though you hadn’t contributed a dime in 30 years.
Then, there are other miscellaneous expenses you’re likely to have in the next decade, like vacations and your wedding. Saving for these vary per individual, but the rule of thumb is to calculate your goal, then divide it by how many months you have to complete it.
Obviously, there are many factors to the things you need to save up for. But to be sure you have more than enough, set aside at least 20 percent of your income to save up for these things. You can definitely go over that, but anything less will make it harder to escape living paycheck to paycheck.
Budget Your Way to Financial Freedom
By establishing and following a budget, you ensure that you always have enough money for the things that you need. With a budget, you can eliminate or at least regulate unnecessary or excessive spending. What’s more, it helps you set clear financial goals and gives you a way to easily reach them. In the end, budgeting can help make your financial situation the best it can be.
For more financial management advice, schedule an introductory phone call with the Wealth Education Academy.