A popular axiom says “Time and tide wait for none.” This phrase directly addresses the predicament of young adults in their 20s. The 20s are a short but highly consequential period of one’s life. Psychologists classify this period into emerging and early adulthood. Among the various milestones that characterize this developmental stage, financial literacy and independence are the most important.
This significant decade of maturation is the best time to seize opportunities for developing your financial acumen.
Budgeting is an evergreen concept of utmost relevance to financial security. Obtaining good budgeting skills is one of the best decisions to make in your 20s. We will consider why this is so, along with the best ways to approach budgeting during this period.
Why Should You Budget in Your 20s?
It is a universal rule of economics that resources are limited but human wants are insatiable. The young adults trying to lay the foundations of financial security in their 20s are not exempt from this rule. You will always have things that you wish to purchase which are more costly than your net worth. This is what makes possessing budgeting and budget management skills a necessity.
What is a Budget?
A budget is an expenditure plan formulated for a future period based on the income and expenses of an individual.
What is Budgeting?
Budgeting is the process of creating a spending plan (budget). It is a systematic approach involving the projection of income and expenses.
What is Budget Management?
Budget Management is defined as the process of monitoring, controlling, and executing a set budget. It is also described as the procedure involved in tracking and overseeing income and expenses. Budget management is a technical aspect of budgeting and it can be done by tools like budget management software.
These budget management software will help you keep track of all your financial things. They can also notify you in a timely manner about overdue payments in order to avoid paying unwanted interests.
Having understood what the foregoing concepts entail, the question remains ‘What makes budgeting important for young adults?’ Here are some of the benefits of budgeting in your 20s:
i) Development of Good Money Habits
Budgeting helps you develop good money habits as you can cut down excessive spending and resultantly, live within your means. You also get to spend on the right items and pay bills promptly. Summarily, financial prudence is a side effect of constant budgeting.
The money habits developed through budgeting in your 20s stay with you for life, and they help you make good financial decisions for many years to come.
ii) Saving For Retirement
If there is one thing that you can never be too early in doing, it’s saving up for retirement. Efficient budgeting can help you start your retirement savings right from this early stage in your career.
iii) Paying Off Debt
If you intend to start repaying accrued debts like your student loans from this stage, budgeting is necessary. By budgeting your income, you’ll be able to organize your expenses in an efficient way that will enable you to pay off your loans without having to bear heavy financial burdens while doing so.
iv) Setting Up Emergency Fund
It is advisable to always have an emergency fund stored up in case of unpredictable expenses like medical bills and vehicle repairs. Proper budgeting can enable you to set up your emergency fund at this stage.
v) Increased Credit Score
When you budget properly, you can spend guardedly and repay credit card loans promptly. This in turn increases your credit score and qualifies you for better financial packages.
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How to Budget in Your 20s
Starting your journey in budgeting and budget management is easier than you think. Here are key steps on how you should go about budgeting in your 20s;
i) Calculate Your Net Income
You are to calculate your total post-tax income across all your streams of income. We’ll assume it is a monthly budget (this is the most common). In this case, calculate your net income by calculating the amount you obtain monthly after deductions. This means if you are paid weekly or bi-weekly, you’d have to multiply your income as appropriate.
ii) Calculate Your Average Expenses
This can be done by taking stock of expenses of previous months and calculating the average amount spent per month. At this point, you are to categorize your expenses into different identifiable sections. Expenses here are calculated to include all instances of spending, irrespective of importance (basic need or luxury). Your budget begins to take shape when you juxtapose your income with your expenses
iii) Factor in Loan Repayment
If you are servicing debt like student loans or credit card loans, you have to factor in the amount you intend to repay monthly. This will occupy a section of your expenses.
iv) Factor in Savings
Being able to save is one of the major aims of budgeting. Whether for an emergency fund, retirement fund, or any other purpose, you have to set out a certain amount from your income for savings.
v) Set Goals
When budgeting, it is best to have a financial goal in mind. This goal could be anything (saving up for a specific expense or limiting expenses on an obsession). However, the goals set during budgeting should be such that they improve your financial discipline and prudence. The goals also serve as yardsticks to measure progress, and how well you stick to your budget.
vi) Apply Relevant Methods of Budgeting
Several methods exist that aid effective budgeting. Some of these budgeting methods are the ‘Envelope Method’, ‘Bullet Journals’, and the ’50-30-20 Method’. The ’50-30-20′ method is a formula that seeks to balance proportional budgeting across expense sectors.
Using this method, you are to divide your income into three parts: 50% for needs and essential expenses, 30% for lifestyle and entertainment, and 20% for savings and debt servicing.
vii) Make Use of Budget Management Tools
Budget management is the icing on the budgeting cake. Effective budget management enables you to fulfill the financial responsibility emanating from budgeting by monitoring and controlling your spending.
Thankfully, today’s technological advancement means there are proficient budget management software that can relieve you of the mental effort required in the budget management process.
Image source: Pixabay
Conclusion
Your 20s make a good period to double down on financial planning in order to rid yourself of debt encumbrance, acquire relevant financial skills, and get set for life. You can start the process of jetting off into financial Eldorado by budgeting.
