Budgeting for Beginners: A Quick Guide for Budgeting in Your Twenties

A budget will help you live within your means. But what exactly are those means? No matter your income level, it’s easy to overspend if you aren’t tracking your outgoing money and paying attention to category-specific spending limits you set for yourself. 

Before you create that budget, though, you need to know what you’re working with. 

To figure this out, you’ll need to calculate the following:

• Your net monthly income after deductions for taxes, Social Security, health insurance and other pre-tax expenses are removed.
• Whether you want to take out additional deductions to fund an FSA, HSA, 401(k) or other account.
• Any additional income you can count on, including income from a second job or side gig.

Tip: Make sure all of this income represents income after taxes. If you’re a freelancer or gig worker, you might need to withhold taxes from each payment you receive. Use an online calculator and/or annual income estimator to figure out approximately what percentage of your paycheck you’re going to owe Uncle Sam when Tax Day rolls around.

Once you know how much you’re working with in terms of take-home pay, you can set a budget that fits within those limits. If you’re just starting out, using a tool like a monthly budget planner can help you easily keep track of those limits, which include essential monthly living expenses as well as discretionary spending.

Essential costs may include the following:

• Rent/mortgage
• Utilities
• Student loan payments
• Transportation
• Food
• Household supplies
• Prescriptions and regular medical care
• Car payment/car insurance

Discretionary spending may include:

• Eating out
• Entertainment
• Shopping
• Travel
• Coffee

Tip: When you create your monthly budget plan, leave room for savings every month. Budget for the cost of saving like you would any other expense — even if you can only swing a small savings contribution at the time. As a starting point, consider following the 50-30-20 rule, which recommends you dedicate 50% of your budget to essential expenses, 30% to discretionary spending and 20% to savings.

If you create your budget and realize your standard of living and living expenses don’t fit your income, you should reevaluate your budget to see how you can make the numbers work. This can involve some tough decisions and some personal challenges to manage your money better than ever, but it’s one of the best ways to develop strong money management habits.

Consider the following steps:

• See if you can trim your discretionary spending budget and stretch your dollars every month.
• Consider scaling back on other costs, such as moving to a place that charges lower rent, getting a roommate, buying a cheaper car, or finding out if you qualify for smaller student loan payments if you’re paying for the cost of attending college.
• Consider getting a second job or side gig to cover these costs.

Tip: If you’re also working on plans to pay off certain kinds of debt while finding your financial footing, consider using a side gig to allocate money to that debt without disrupting your day-to-day budget. Once the debt is paid off, you can divert those earnings to savings or other living costs, or you can quit the side gig and free up more time for yourself.

You’ve got a practical budget in your back pocket, and now it’s time to walk the walk. Learning how to live on a budget may involve a process of trial and error and learning from your financial mistakes, but the lessons learned through this process will continue to deliver benefits later in life when your annual income may be higher.

Hold yourself accountable by following these steps:

• Use tools like a monthly budget planner or a money management application (available in our online banking platform) to track spending by category.
• Set up auto draft to cover bills and savings.
• Plan meals ahead to avoid impulse takeout purchases.
• Look for low-cost entertainment options that stretch your spending.
• Avoid credit cards if you end up spending over your limits.

Tip: If you regularly struggle to stick to budgeted amounts, consider trying out the envelope method of budgeting, which enforces strict budget limits by placing your monthly spending allotment for each category into an envelope. When purchases are made, you pay for them in cash and pull money from these envelopes. When the money in the envelope runs out, your spending power for that month does, too.

Once you’ve established a regular budgeting habit, you have a blueprint to help you achieve larger financial goals. This can include purchasing a house, increasing your retirement savings or saving up for a child’s college tuition.

Here are some tips to achieve this:

• Set aside savings specifically for dedicated goals. Consumers between the ages of 18 and 25 can set up an edge savings account, which offers free access to educational resources that will expand your financial wisdom as you find your footing as an adult.
• Challenge yourself to make additional savings contributions along with standard monthly amounts.
• As your income increases, maintain your current standard of living and dedicate the net pay increase to savings.

Tip: One strategy for special savings goals is to set up a savings account specifically for this goal and to set up automatic contributions to keep yourself on schedule with your savings goals. Once that goal is reached, you can empty the account and use it to start building toward your next savings goal.