Budgeting for the first time can be a stressful or exciting thing to do. It’s exciting in the sense that you’ll be on your own for the first time, but it’s stressful because all of a sudden you’re responsible for all your expenses. How you budget for your expenses is completely subjective, but there are a few things to prepare yourself.
The most important thing to understand when you’re budgeting for the first time is to ensure that your monthly expenses are less than your income. Obviously, if you’re spending more than you make, you’re going to run into some serious issues. Below I’ll show what a standard budget should look like and how you can manage your expenses.
What a standard budget looks like
Before we get started on the budget, we need to establish income. Let’s say you’re making a gross salary of $40,000 or roughly a monthly take-home income of $2,650 in Ontario. We’ll also assume you have no debt. A standard first-time budget may look something like this.
|Savings per month
At first glance, this seems like a reasonable budget since you’re still able to save $300 a month, but have you considered all your expenses? What this budget fails to account for are things such as toiletries, makeup, and other personal items such as clothing. Many people also forget to budget for presents since they don’t come up every month. Oh, how about vacations? It doesn’t take much to wipe out that “savings” you were budgeting.
Making a realistic budget
Despite the fact that your first attempt at budgeting may have been a bust, there are a few things to balance it. You’ll notice that food is estimated at $500 with another $250 set aside for socializing. That’s a lot of money for those two categories. You could easily cut back there and allocate your money somewhere else. But how do you determine how much you should be spending per category? By tracking your spending of course.
Tracking your spending is exactly like it sounds. For a month or two, you should write down everything you spending money on. Literally, everything. Buying a coffee or hot dog? Write it down (or log it). The point of this exercise is to see exactly how you’re spending your money. After a month or two, you may realize you’re wasting money on a few things. There’s nothing wrong with spending, but if you’re budgeting, you may realize that money is better used for other things.
Keep in mind that this is your first budget, so it’s not meant to be perfect. Things change all the time so you shouldn’t feel guilty if things aren’t perfect. Also, if you’ve just landed your first job and you’re currently on an entry level salary, it’s okay to not have a ton going towards savings. That being said, you’ll want to ensure you have an emergency fund in place in case you run into any problems with your money.
Understanding your priorities
Priorities are a bit subjective when it comes to budgets, but there are a few things to consider. First off, you’ll need to consider your income vs. expenses. If your expenses exceed your income, then you’re in trouble. To reduce those expenses, you may have to make sacrifices such as finding a roommate or renting a cheaper place. You may also have to cut back on all that eating out and socializing.
Having positive cash flow is great, but building an emergency fund is absolutely paramount. Generally speaking, most experts recommend saving three to six months for your emergency fund, but that’s not realistic if you’re moving out for the first time. I personally recommend trying to put aside one to two months of expenses aside since it’s much more manageable. More importantly, this emergency fund will bail you out if you run into financial difficulty. You know, like a job loss.
As for priorities within your budget. You need to decide what’s important to you. If travelling is a goal, by all means, save for it. However, if you happen to have credit card debt, then that should be your priority since it comes with a huge interest rate.
Priorities are usually chosen by you, but sometimes certain things are automatically decided for you due to the cost associated with them.
Even if you live at home, creating a budget is a practical thing to do since it’ll teach you how to manage your money. As your income increases, try to keep your expenses the same. By doing this, you’ll avoid lifestyle inflation and grow your savings fast.