Adulting is a term Millennials like to use when life hits you hard, wishing you could relive the days of being a kid with few worries. Being an adult means no longer having someone making decisions for you or holding your hand through the process. Adulting means taking control of your budget, your health, your retirement, and your life. One of the areas of adulting most Millennials struggle with is budgeting. Between student loans, rent/mortgages, car payments, transportation expenses, food, fun, entertainment, and potential credit card debt, there is a lot to consider. If there is anything left, does it go towards saving for retirement or a rainy day fund? Where does one begin? For Millennials, budgeting is the most important step in saving for retirement while simultaneously paying off debt.
4 STEPS TO MAKE MILLENNIAL BUDGETING SIMPLE
1. Calculate Your Earnings Each Month
You need to know how much you make after taxes, health insurance, and 401(k) deductions. If possible, contribute to your 401(k) up to the maximum amount of what your employer matches. Saving for retirement is crucial, and the reason you want to contribute to your 401(k) is that your employer is essentially giving you free money. You would otherwise not receive this free money in your regular paycheck. Can you say “no” to free money? With compounding gains year over year, the earlier you begin saving for retirement, the better. Even a few years will make a considerable difference in thousands to tens of thousands of dollars in the long run.
Through our budgeting example, we are going to assume you are single with no credit card debt, earn $50,000, and set aside roughly 24% for federal taxes, FICA taxes, and medical insurance. We will also assume you set aside 4% for 401(k) contributions. These assumed costs leave roughly $36,000 in cash for the year or $3,000 per month. You can use this calculator tool for assistance. You can use this calculator tool for assistance.
*Please note: your salary, state taxes, and living expenses will vary greatly based on your geographical location and occupation.
2. Calculate the Essentials and Subtract Them From Your Earnings
You need to know how much money you have to spend on food, fun, entertainment, and savings. Before we can do this, we need to know the essentials that need to be paid each month. Take your monthly payment amount and subtract rent/home payment, real estate tax (if applicable), home/auto insurance, car payments, utility bills, phone bill, internet bill, subscription services, etc.
Earnings: $3,000 monthly
– $1,500 (includes rent/home insurance, property taxes, utilities, and HOA fees if applicable)
– $125 auto insurance
– $150 for electric bill
– $100 transportation cost
– $50 for utility bills (water, trash, recycling)
– $100 for cell phone bill
– $50 for internet bill
– $50 for subscription services (Netflix, Hulu, Amazon Prime, etc.)
– $400 a month for car
Total Deductions = $2,525
Calculation: $3,000 monthly budget – $2,525 = $475 per month
*Please note: these are estimates and will vary greatly by location, living situation and personal preferences.
3. Put Money Into an Emergency Fund for Savings
Doing this will make budgeting simple in the future if you have an emergency fund established to fall back on. Your car may break down, or you may lose your job one day. Life is full of surprises, and you need to prepare for them. Let’s set aside another $100 per month for savings/emergencies.
Putting savings into a bank account is fine, but banks provide little interest in savings accounts or CDs. This low interest will likely lose you money over time if it is less than the annual inflation rate (cost increase of goods per year). Instead, consider putting money into a Roth IRA to allow gains to grow tax-deferred. You can contribute up to $6,000 to a Roth IRA if you are under 50. Roth IRAs can be a powerful emergency fund, saving fund, and retirement fund. You can take Roth IRA distributions tax-free at any time. If you hold your Roth IRA for five years or more and are under 59 ½, you can withdraw your gains on investments and only pay a 10% early withdrawal penalty. Stocks are relatively easy to liquidate, and you should be able to receive Roth IRA distributions for emergencies within a week or two.
Yes, there is a risk of loss on investments. However, statistics show that if you invest for the long term in well-known stocks, the typical return is 8-10%. Would you rather work for money, or have your money work for you? By investing more, you are having your money work for you, and over time this can be the difference of thousands to tens or even hundreds of thousands of dollars in additional funds.
4. Stay Within Your Budget
Discipline is essential. Okay, so this step is not that simple, but it is needed if you want to manage your budget successfully. You can make budgeting much more complicated, but it can be simple if you stay within your budget. If you know you overspend with credit cards, consider shredding the card(s). Or, lock the card in a lock-box and give the key to a trusted friend or family member. Withdraw your budgeted “fun” money in cash each month. This way, you are only able to spend what is available to you in cash. Physically seeing your available cash in your wallet allows you to see how much you are spending and hopefully leads to you saving more. You may find yourself naturally looking to cut expenses, clip coupons, find cheaper alternatives, or find ways to generate additional income through a side hustle. Stay tuned to Midland Trust for our next article to learn about reducing your monthly budget. We will also discuss investments as a way to increase your “fun and entertainment” budget.
AVAILABLE BUDGETING TOOLS THAT MILLENNIALS LOVE
Are you struggling to set a budget? Consider using an app such as Mint, Simplifi, or Dave Ramsey’s Every Dollar. These apps can consolidate your accounts (credit card, bank, investing accounts, etc.) into one and break down your expenses into categories, making things easier to view. They can also send you alerts when your balance is low, or you have upcoming bills.
MIDLAND TRUST IS NOT A FIDUCIARY: Midland’s role as the custodian of self-directed retirement accounts is non-discretionary and administrative in nature. The account holder or authorized representative must direct all investment transactions and choose the account’s investment(s). Midland has no responsibility or involvement in selecting or evaluating any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.