Time for a little pop quiz. Choose which of the following best describes your approach to money:
A: As long as I don’t open my bank and credit card statements, nothing can hurt me.
B: I know where every cent is going because I have 17 spreadsheets to track everything.
C: Budget, schmudget. I have a rough idea of how much I spend on certain things, but there’s no point in making it official.
D: I have enough on my mind already since I’m busy trying to find a job. I’ll worry about money once I’m actually making some.
Any of these sound familiar? (By the way, if you answered B, you can go ahead and skip to the end of this article where you share your amazing know-how with the rest of us.)
There’s no doubt that your post-college years are a time of transition. If you’re still looking for a job, it’s easy to let that take precedence over everything else in your life. And if you’ve started working, the thrill of paying your own rent, bills, and maybe even covering some extravagances like concert tickets and the occasional bottomless mimosa brunch can be exciting enough to keep you going for quite a while.
But there’s a better way to budget than any of the techniques I’ve outlined above. Recent graduate guest writer Deirdre Quirk shares a few super simple tips on budgeting as a twentysomething—both before and after you land that first official job.
Budgeting before you get a job
At first the notion may seem counterintuitive—budgeting before you get a job? How is that possible? You don’t know how much money you will have to budget with, and quite possibly you don’t know where you’ll be living either. So you have no clue what you’ll pay for rent, utilities, or food. But hear me out—budgeting is one of the smartest things you can do before looking for a job, and it’s not as difficult to do as it sounds.
First, why budget? For me, the biggest factor was pay—I knew I needed to get a job soon, but I also wanted to know what the absolute minimum was that I would need to be paid in order to be financially independent. Thus I estimated my monthly costs and determined what I would need to be paid hourly, monthly, and per year in order to meet those costs.
Of course, it’s also a useful exercise to do the other way, too. If you can get a rough estimate of how much jobs that you are applying for might pay you, you will know how much you’ll be able to spend each month.
And how do you go about creating a budget when you know neither your income nor your expenses?
Scenario 1: Figure out your expenses first
Let’s start with the scenario where you want to work out your expenses first, so that you know how much you need to be paid to live how you want to. First, make a list of all your necessary monthly expenses: rent, groceries, bills (water, energy, internet, phone), student loans. And don’t forget to add on things that are unique to you: transportation (public transit or gas money), pet-related costs, and anything else that you absolutely have to pay for each month.
Then do your best to figure out what each of these will be. Some of this you’ll know: how much you need to pay for student loans, for example, and you may already have signed a lease on a place or be planning to stay in the same apartment you have rented for the past year. Others will be extrapolation from past expenses: You can probably expect pet costs to stay the same, and although I moved from Portland to San Francisco, my monthly grocery costs have stayed relatively similar.
And some expenses will need to be researched: What is the average rent on a one-bedroom apartment in the city you want to move to? How much does a one-month bus pass cost? Water and energy bills are perhaps the trickiest, as they are difficult to research easily online, and can often change quite a lot when you change living situations, but a combination of asking people in your network what they pay, extrapolating from your past bill expenses, and researching what you can on the internet will generally lead to a rough estimate.
Once you have a total for your one-month expenses, the only thing left to do is to break this down into salaries and/or hourly pay. Some jobs pay monthly, in which case it will be fairly clear which ones will cover your expenses, but others pay yearly or hourly and you will need to calculate how much that comes to each month. Don’t forget that a significant part of your paycheck will go towards taxes—there are tons of great online resources that can help you figure out how much will be taken out.
Now you can confidently apply to jobs that will cover your living expenses, and when you hear that dreaded question, “What are your salary requirements?” you will at least have an idea of the bare minimum you would need.
Scenario 2: Figure out your income first
What about the scenario where you start from a rough idea of how much you might get paid and work from there? There are plenty of recent graduates who have a very good idea of what sort of job they are looking for. For example, my housemate knew she was qualified for, interested in, and applying almost exclusively to chemistry production jobs, many of which fell in the same salary range. If this applies to you—and especially if you are also looking for a place to live, considering buying a car, thinking about getting a pet, or any of the above—it is often a more sensible way to plan your budget.
Always work from the lower end of the salary range that you are anticipating. If you’re expecting to get paid $40,000 to $48,000 a year, for example, plan your budget for $40,000. Next, work from the known expenses—phone bill, student loans, any subscriptions or continuing expenses. Then, add in anything that needs to be estimated, like water and energy bills, groceries, rent. Finally, do a quick calculation and see how much you have left. This is your stretch money, and your budget can be recalculated from here.
Let’s say you were considering getting a dog. Calculate what your expenses will be each month, subtract it from your anticipated salary, and with the leftover money, ask yourself if you can afford the monthly expenses associated with a pet. Or let’s say you originally calculated your budget anticipating you would rent a room in a house, but you really want your own apartment. If you have leftover money after you’ve calculated your initial budget, recalculate and see if you can afford your own apartment instead.
If you calculate your budget with your anticipated salary, and end up with a deficit, consider what can be changed. Can you cut down on your food expenses? Live in a different area of town? Take the bus instead of paying for gas?
Once you have a provisionary budget worked out, you can begin to look for a place to live, adopt a cat, buy a car, or move to the city you want to live in!
Budgeting after you get a job
Wait, you might be thinking, I’ve already worked out a budget while I was looking for a job—do I have to do it all over again now that I’ve got one?
While it is not necessary to completely rework your budget, especially if you discover that most of your expense estimates or salary estimates were fairly accurate, it is definitely a good idea to take another look at your budget and refine it even further.
After you have a job, and have been living in the same place for several months, you will have a much more accurate picture of your finances, and you may find that you have more or less extra money than you thought, in which case you will need to decide what to do.
Another reason to reconsider your budget is that if you have excess money, you may find that any money that does not go to necessities tends to disappear very quickly, and you are not sure exactly what happens to it.
And if you want to start saving, either for a rainy day or for something in particular, budgeting more carefully to figure out how much you can afford to put away each month is also incredibly helpful.
The first step in reworking your budget after you have a job is to perform the same calculations you did before getting a job (monthly salary minus necessary expenses), but with your more accurate figures.
The next step is to figure out what to do with the money that is left over. Once again, there are essentially two ways to do this: You can figure out what you want to be spending money on each month, and allot yourself a certain amount of money for each category, or you can spend a month tracking your expenses, figuring out what you actually do spend money on, and determining if there is anything about your current habits that you want to change.
Whichever way you choose to do it, this exercise is particularly helpful if you are the kind of person who always finds themselves dipping into the money they need for their necessities (guilty). Another trick to help yourself not spend money you don’t have is to open two checking accounts: one where you put all the money you absolutely need to live, and one where you put the rest of it. That way, when you’re out shopping, or at a bar, or going out to dinner, you only use one debit card, and know that once you’ve hit the limit on that, you’re out. No more accidentally using the gas money to buy just one more drink!
It’s also great for those who want to start saving up rather than just spending all of their extra money immediately. Figure out about how much you want to save each month, or how much you can cut out of your “fun” expenses, and start putting it into a savings account. Automatic transfers are great for this, because they take the money out of your hands before you can spend it.
Goals are also helpful, like “I really want to buy that really nice leather bag, but it costs several hundred dollars. If I save $25 each month, how long will it take me to get it?” Even if you have a goal like this, though, be sure to always save a little more than you need to purchase your dream item. When the car breaks down, or your dog gets sick, or you lose your job unexpectedly, you will be very glad to have built up enough savings that you can cover the costs without worrying about making rent.
The best thing about budgeting after you have a job is figuring out how to spend your money in a way that means you get to buy all the things you enjoy—supplies for your craft projects, treats for your dogs, fancy dinners, stylish sweaters, whatever you want—and still know that you have enough money to live on and enough for emergencies. After all, the real point of budgeting is so that you have to think and worry about money as little as possible in your day-to-day life.
Homework time! Try out one of Deirdre’s suggestions, either for monitoring your spending or predicting what you think it will be. We also really like Jenny Blake’s Four-Step Budget Google doc.
P.S. Have any budgeting tips you’d like to share with other recent grads? Let us know in the comments section below!