Creating a budget might seem overwhelming at first, but it's a crucial step toward financial independence and achieving your goals. This guide is for young adults with low to moderate incomes, working entry-level jobs, and possibly living with parents or roommates. Let's dive into how to make a budget that's practical, easy to follow, and helps you use resources like First Alliance Credit Union's budget calculator and financial products.
Your budget starts with knowing how much money you bring home each month, known as your take-home pay. This is your salary after taxes, insurance, and other deductions. If you have multiple sources of income, such as a part-time job or side hustle, include those as well.
Net Monthly Income:
Main job: $1,800
Side hustle: $300
Total: $2,100
Understanding your net income is crucial because it’s the actual amount you have to budget with. Gross income (total earnings before deductions) can give you a false sense of financial security.
Your budget works best when all your spending remains within the amount you allocate for each line item expense. These include both fixed expenses (rent, car payments) and variable expenses (groceries, entertainment). Use bank statements, receipts, or a budgeting spreadsheet to track these. For this budget example, we are looking at Bailey, a 24 year old working full time for $15/hr., plus has a side hustle making $300 a month, she shares an apartment with two roommates.
Rent: $500
Utilities: $100
Car payment: $200
Insurance: $150
Remember to account for occasional and annual expenses. These might include car maintenance, medical expenses, or subscription renewals. When you know where every dollar is going, you can find the best ways to save money and earn interest, and you’ll be able to put money in your savings.
Identify your short-term and long-term financial goals. Short-term goals might include saving for a trip, while long-term goals could be paying off student loans or building an emergency fund.
Financial Goals Examples
Short-term: Save $1,200 for a summer trip to Thailand.
Long-term: Build an emergency fund of $3,000.
Setting realistic goals helps you stay motivated and provides a clear direction for your budgeting efforts.
Now, compare your total income to your total expenses. Use this to set spending limits and allocate money towards your goals. This is where a zero-based budget can be helpful, where every dollar has a job.
Income: $2,100
Expenses:
Fixed Expenses: $950
Variable Expenses: $475
Savings for Trip: $250
Emergency Fund: $100
Remaining Balance: $325
According to one Gallup poll, only a third of Americans actually keep a household budget. Using a budget calculator, like the one offered by First Alliance Credit Union, can simplify this process. It helps you see where your money is going and adjust your budget accordingly.
An important part of budgeting is ensuring your savings are working for you. First Alliance Credit Union offers high-interest Certificates of Deposit (CDs) that can help grow your emergency fund faster. CDs typically offer higher interest rates than regular savings accounts, making them an excellent tool for building your savings.
Certificates of Deposit (CDs) offer higher interest rates compared to regular savings accounts, which means your money can grow at a faster pace, providing you with more significant returns over time. These higher rates are particularly beneficial for those looking to maximize their savings potential without taking on additional risk.
CDs come with fixed terms, which range from a few months to several years, and this structure helps you avoid the temptation to dip into your savings prematurely. By locking in your funds for a set period, you are less likely to spend them impulsively, ensuring that your savings remain intact and continue to grow.
Additionally, CDs provide a secure and reliable way to increase your emergency fund, as they are typically insured by the NCUA up to the applicable limits, offering peace of mind that your money is safe. To make the most of these benefits, consider setting aside a portion of your savings into a CD. This strategic move can help you maximize your interest earnings, allowing you to build a more substantial emergency fund over time, which can be crucial in providing financial security during unexpected situations.
At First Alliance Credit Union, we love seeing our members make smart financial decisions, like building up their savings. That's why we offer WINcentive Savings Accounts, which provide the excitement of winning cash prizes without any risk. Even if you don't win a prize, you'll still end up with more money than you started with. For every $25 increase in your balance each month, you earn entries into various prize drawings, making saving fun and rewarding.
Managing debt and building credit are essential parts of a solid financial plan. First Alliance Credit Union offers personalized plans to help you pay down debt and build credit.
List all debts: Begin by compiling a comprehensive list of all your outstanding debts. This should include credit cards, student loans, personal loans, and any other financial obligations you may have. Be sure to note the total amount owed, the interest rate for each debt, and the minimum monthly payment required. Having a clear picture of your debt situation is the first step toward effective management.
Prioritize high-interest debt: Once you have a complete list of your debts, identify those with the highest interest rates. These are the debts that cost you the most over time, so it’s financially wise to focus on paying them off first. By directing extra payments toward these high-interest debts, you can reduce the total interest paid and free up more money in the long run. This strategy, often referred to as the "avalanche method," can significantly accelerate your journey to becoming debt-free.
Make consistent payments: Consistency is key when it comes to debt repayment. To ensure you never miss a payment, consider setting up automatic payments through your bank or creditor. This not only helps you avoid late fees and potential damage to your credit score but also keeps you on track with your financial plan. Regular, timely payments demonstrate financial responsibility and can improve your creditworthiness over time.
Use credit responsibly: When using credit, it's important to borrow only what you can afford to repay comfortably. This means assessing your financial situation and ensuring that any credit you take on fits within your budget without causing financial strain. Responsible credit use involves understanding the terms of your credit agreements, such as interest rates and repayment schedules, and making informed decisions about when and how much to borrow. By doing so, you can avoid accumulating debt that becomes unmanageable and maintain a healthy financial balance.
Pay on time: Making timely payments is crucial because it significantly impacts your credit score, which is a key indicator of your creditworthiness. Late payments can lead to penalties, increased interest rates, and a negative mark on your credit report, all of which can make it more difficult and expensive to borrow in the future. To ensure you pay on time, consider setting up automatic payments or reminders. Consistent, on-time payments demonstrate financial responsibility and can help improve your credit score over time, opening up more favorable borrowing opportunities.
Monitor your credit: Regularly checking your credit report is an essential practice for maintaining your financial health. By reviewing your credit report, you can identify any errors or discrepancies that may negatively affect your credit score. Monitoring your credit also allows you to track your progress and see how your financial habits are impacting your credit over time. This proactive approach helps you catch potential issues early, such as identity theft or unauthorized accounts, and take corrective action promptly. Keeping a close eye on your credit report ensures you stay informed about your financial standing and can make adjustments as needed to improve your credit profile.
Utilizing First Alliance Credit Union’s resources, such as debt management plans and credit-building products, can provide structure and support to achieve your financial goals.
Monitor your spending regularly and make adjustments as needed. Use budgeting tools like First Alliance Credit Union’s budget calculator or apps to keep track of your expenses and ensure you're staying within your limits.
Use a budgeting-friendly shopping list: Plan your purchases to avoid impulse buys.
Track your expenses daily or weekly: Use a budgeting spreadsheet or app to keep tabs on your spending.
Adjust your budget as needed: Be flexible and make changes if your financial situation shifts.
Tracking your spending helps you stay accountable and make informed decisions about your finances.
Review your budget at the end of each month to see how well you stuck to it. Make adjustments based on changes in income or expenses. This practice helps you stay in control and adapt to any financial changes.
Compare actual spending to your budget: Identify areas where you overspent or underspent.
Update your goals: Adjust savings or debt repayment goals based on your progress.
Plan for upcoming expenses: Include any known expenses for the next month.
Regular reviews ensure your budget remains realistic and aligned with your financial goals.
Let's look at some real-life examples to see how budgeting can help achieve specific goals. By following a structured plan, it's possible to save money effectively while still covering essential expenses. These examples will show how young adults can manage their finances to reach their dreams.
First you should figure out your vacation costs. In this case, by allocating $250 a month, a 22-year-old can save $1,200 in five months, enough for an epic trip to Thailand. Using First Alliance Credit Union’s budget calculator can help ensure every dollar is accounted for and savings goals are met efficiently.
Income:
Main job: $1,800
Side hustle: $300
Total: $2,100
Expenses:
Fixed Expenses: $950
Variable Expenses: $475
Savings for Trip: $250
Remaining Balance: $425
A family can build an emergency fund of $3,000 in six months by saving $500 monthly. They can further grow this fund by using First Alliance Credit Union’s high-interest CDs, ensuring their emergency savings earn maximum interest.
Income:
Expenses:
Fixed Expenses: $2,000
Variable Expenses: $1,000
Emergency Fund: $500
Remaining Balance: $500
Creating a budget is essential for managing your finances and achieving your goals. Start by calculating your take-home pay, listing your expenses, setting realistic goals, and tracking your spending. Utilize resources like First Alliance Credit Union’s budget calculator, high-interest CDs, and debt management plans to enhance your budgeting efforts. Adjust your budget as needed and review it regularly. With these steps, you'll be on your way to financial stability and achieving your dreams.
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