The Ultimate Beginner’s Guide to Budgeting and Saving

That’s it! You did it! You are finally on your own, out of your parent’s house, and thrown into the real world full of opportunities and possibilities. You may have no idea how to begin this next stage in your life’s journey but don’t be alarmed, not many people are really prepared to become an adult and the first thing adults need to do is get their finances in order.

Budgeting

The first step in creating a working plan for the future is understanding what your budget is and how to stay in line with it. Well, it all begins with looking into your current expenses, income, and planning on what you can afford. If you are moving out of your parent’s house, begin by looking into where you want to move and the associated expenses. Are you going to need a car? Will you be given furniture or will you need to buy everything from scratch? Start with your largest expenses and work your way down the list remembering to include items most people would forget until they get the bill in the mail. 

Rent 

Rent is one of the largest expenses for any individual or household. Rent payments should be seen as an umbrella term as your rent normally has many bills attached to it. Getting your own place offers so much freedom and with that a lot of responsibility. When looking for your new home, consider the neighborhood, what the average price of rents are and whether or not you should be getting yourself a roommate. 

In many cases, such as moving away from home to go to college or university, rent prices in the area you are moving to are typically expensive. You will have many choices to consider such as living beside the school but paying higher rent prices for the location or living further off-campus but having to deal with the commute. This same concept applies to a new job. Consider all of these factors when choosing your new place and you can guarantee no surprises are waiting for you. 

When calculating rental expenses and when discussing your contract understand the costs associated with your new home. Is it in an apartment building? There will probably be monthly maintenance costs that are not included in the rent. Electricity, water, property taxes, cable bills, phone bills, internet, and Netflix subscriptions are just a few of the bills a new place comes with and individually they don’t seem too daunting but when added up altogether can add hundreds of dollars onto your monthly expenses. Calculate what you will require in your new home, do some research online and determine what you can budget for as well as how much money you can actually afford to pay in rent. 

Transportation  

Moving to the city? Need to drive to work? Transportation costs are another type of expense that adds up quickly. Do you think because your car is paid off that this won’t affect you? Think again. Cars require gas, maintenance, parking spots, you can get parking tickets, and many other things that can surprise you. Consider what you will need monthly for your car and add it to your expense budget. In some cases, a parking spot in the city can cost more than rent and this is not something you want to have to worry about after you’ve closed on a rental property. 

If a car seems way too luxurious for your lifestyle consider where you live and what a monthly bus pass would cost. Calculate how often you will be using taxis, trains, and other means of transportation, and add this to your budget. Maybe you will determine that having a bike is better and that you should purchase one and give up your car. Figure out what that would cost? By budgeting accordingly, you can prepare yourself for anything that the world throws at you and ensure you have enough saved up to get you that new set of wheels, regardless of how many wheels you’ve figured out you need. 

Insurance 

Now that you have figured out how much your basic needs will cost you, it’s time to protect your hard-earned cash with insurance.  Car insurance, rental insurance as well as health insurance are the big-ticket items to be thinking about at this time in your life. If you have children it is also recommended to take out a life insurance policy to guarantee your children are not left with your debts if you were to pass away. 

For people under the age of 26, it is likely they are covered under their parent’s insurance plan if they have one, so do your due diligence and look into this option. If not, it is highly recommended to take out an insurance plan of your own. One of the largest causes of financial debt in the United States is due to overwhelming medical bills and by budgeting accordingly now and paying into a health insurance plan you can avoid the endless abyss that health bills can create for your pocket.

By paying into car insurance, health insurance, and the like, you can easily budget for the month and not have to worry about a catastrophe throwing your financial stability for a loop. Consider bundling multiple insurance policies under the same company for better pricing or using the same company as your parents for even more savings.  

Credit Cards

Credit cards are amazingly horrible. They allow us to purchase things without even thinking about the actual expense and it is very easy to lose track of how much you are actually charging to your credit card every month. Interest rates on unpaid credit card loans are the largest debt payments the average consumer is faced with. By creating your budget you are ensuring that you do not get caught up in the ever so popular credit card debt scheme that many Americans are continuously plagued with. Cover all your bases by staying within your means to ensure you don’t get caught up in this difficult-to-break cycle. 

Food 

The largest expense in a home after rent payments is the cost of food. Buying food outside of the house and ordering in can add up quickly. Even going grocery shopping without a plan can lead to costly food bills. Purchasing premade foods, fruits, and veggies out of season as well as expensive meats and fish can take a toll on your monthly food budgets.  Start by considering what you want to budget monthly for groceries, make a list of what you want, see how much you eat after a week, and make amendments accordingly. You also want to consider what you should be purchasing in bulk such as non-perishable goods. By paying attention to the prices of these items you can figure out where the best places to buy them are and create a routine that works for you and your food budget. 

Miscellaneous 

It is impossible to consider all future costs and this is where your budget for miscellaneous items comes into play. By leaving some money set aside for those unexpected expenses, you are preparing for the unknown. Miscellaneous expenses could be an evening out, a road trip with friends, an expensive textbook you need to buy. Regardless of what the miscellaneous item is – by having a budget for these things you don’t need to worry. 

Saving 

Having money set aside for a rainy day is the key to being financially stable today and in the years to come. Now that you have budgeted for all your future expenses – you can determine your disposable income – the amount of money you will have leftover after all of your necessary expenses have been paid. Take this amount and determine what percentage you want to save and for what. 

Paying Off Debts  

Before you begin saving, it is vital to pay off any outstanding debts. The interest amounts you will be paying on your outstanding debts will greatly outweigh any money you make from any investment or savings accounts. Create a plan to pay off your debts. If you have many debts it may be in your interest to look into refinancing options. With the current market, interest rates have dropped and you may be able to combine all of your outstanding debts into one easy monthly payment making it easier to tackle and even easier to budget for. 

Down Payment 

Now that you have your debts figured out and have looked into the savings accounts available, it may be time to start thinking about a down-payment on a house. Not only is real-estate one of the best investments out there, by saving enough for a downpayment you can ensure that in the future you will be paying off your mortgage versus paying rental fees. Paying into a mortgage is paying into an appreciating asset, rent however is paying off your landlord’s mortgage and has no reward for the renter themselves. Start saving now for your down payment. Look into the housing market and determine how much you need to save. Calculate monthly expenses and allocate significant amounts to your down payment savings account. Having your first asset opens a world of possibilities – all it takes is some diligent saving now to make huge strides into your future. 

High-Interest Savings Account 

Once you have paid off all outstanding debts start looking into a high-yield savings account. A high-interest savings account will give you a higher interest rate compared to keeping your money in your bank. These accounts tend to have higher interest rates as they put stipulations on when and how much money you can withdraw. The more strict the account is, the higher the interest rate on your money will be. If possible, set-up automatic payments to guarantee your account is growing as fast as you would like it to. Once this is done, you can sit back, relax and watch your money grow! 

Another type of high-interest account is a money market account. This account is a chequing, savings account hybrid that offers a higher interest rate than most other accounts of the same nature. A money market account puts limitations on how many transactions you can make which includes withdrawals and transfers alike. These account types are insured up to $250,000 and do not lock up your money like other high-interest investments. 

Certificate of Deposit 

Speaking of a high-interest savings account that locks up your money – let’s talk about a CD or certificate of deposit. This is a great way to save in the short term as a CD locks your money for a fixed amount of time at an interest rate that is higher than other savings accounts. Similar to a money market account, CD accounts are also FDIC insured up to $250,000.  The one catch with CD accounts is if you need to take out the funds before the agreed-upon term ends you will be required to pay a penalty fee – an amount that is usually fairly close to the amount of interest you would have earned on the money anyways. Another important point to take into consideration is that a CD requires a minimum account balance – the longer your term and the higher the minimum amount – usually means a higher interest rate. 

As a beginner, doing your due diligence is the best thing you can do.

By understanding how to budget as well as how to save for what you want and what you ultimately need, you are already making huge strides into your financially independent future. Start implementing these simple methodologies into your everyday life today and reap the benefits now and in the years to come.