Budgeting on Your Starting Salary

When you get your first real job and earn your first paycheck, you suddenly are faced with the prospect of managing your money. You have to figure out how to pay for rent, groceries, electricity, and other necessities. Budgeting when you are in school or when you have help from your parents is one thing, but once you are on your own, successful budgeting is the only thing that will keep you financially afloat now and into the future.

Unfortunately, household budgeting is not taught in school, and as a result, two-thirds of Americans can’t pass a basic financial literacy test. There are recent college graduates earning six-figure salaries and drowning in debt, and there are large families operating on very modest incomes with savings in the bank because they know how to budget.

To illustrate how poorly we manage our money, here are some concerning statistics:

• 44 percent of Americans don’t have $400 cash for emergencies.
• 43 percent of those with student loans are not making payments.
• 38 percent of American households are carrying credit card debt.
• 33 percent of American adults have nothing saved for retirement.

That’s why every household needs to have some kind of budget, even if you are just starting out.

What Are You Earning?

When you get your first full-time job, you may be surprised at the difference between your gross income and what you actually take home. Your net pay will be lower than your gross paycheck after deductions for Social Security, taxes, Medicare, and so on. Be sure to use your net pay for budgeting purposes.

Also, consider how employer benefits affect your spending. For example, understanding your medical coverage is important when budgeting. Will your company health plan cover a lot or a little of your medical bills? How much is your copay? Be sure to take advantage of company 401K and other savings plans; they will help you to save so you don’t have to allocate as much money for savings in your budget.

Many companies offer other benefits, such as commuting vouchers, gym memberships, paid parking, and so on. Be sure to make a list of paid benefits so you can cross them off your list of budgeted expenses.

How Much Do You Need?

Once you have a true picture of your monthly net income, you need to take a hard look at monthly expenses. Make a list of all of your spending, including necessities such as food, rent, transportation, insurance, and utilities, and incidentals such as spending on movies or dining out. Also, be sure to take an inventory of your debt and list how much you need to pay each month for student loans, credit cards, car payments, and so on.

In her book, All Your Worth, Senator Elizabeth Warren and her daughter Amelia outline the 50/30/20 budgeting strategy which many economists agree is simple and effective. With this budget, 50 percent of your net income should be earmarked for essential spending such as food and housing, 30 percent of spending is for incidentals such as clothing and travel, and 20 percent is for savings and paying off debt.

Many households stretch their budgets well beyond the 50/30/20 rule, but be sure to pay attention to expenses that fall under that 20 percent. For example, you should make creating an emergency fund a priority. You can start with $500 set aside for small emergencies and repairs, but ultimately, experts suggest you should have enough set aside to survive for six months if you lose your job. Start with a savings account from your local credit union to set aside money for an emergency.

Also, make it a priority to get rid of toxic debt. This is the amount owed to high-interest credit cards, personal loans, medical bills, and other unsecured debt. If your toxic debt is piling up, consider discussing a debt consolidation loan or some other strategy with your credit union.

After some calculations, you may find that your budget is too tight. Consider strategies to reduce your monthly outflow, such as changing to a cheaper mobile phone plan or cutting monthly subscriptions to cable TV channels or services such as Hulu, Netflix, or Spotify. These kinds of subscriptions are usually charged automatically to your credit card or bank account so you tend to forget them and they can quickly add up.

Include Savings in Your Budget

Consider budgeting for other long-term savings programs for retirement using CDs or a Roth IRA. These strategies will help you put aside money for the future. Even if you are just starting out, it is never too early to save for retirement.

Also consider a savings account or money market account to put money aside in, in case you need it for unexpected car repairs or other expenses, or even for a fun vacation. Putting money in savings means it’s not readily available for impulse spending, but you have access to it when you want it.

It’s wise to develop effective budgeting strategies early, and there is no time better than when you get your first real paycheck. Understanding how to manage a budget is a skill that you can use throughout your life, and that surprisingly few Americans have mastered. If you want help with your budget, stop by your local credit union and ask for advice. Here at iQ Credit Union, we are always ready to help our members manage today’s expenses and plan for the future. For parents looking to educate their children early, check out iQ Credit Union’s financial education offerings. We utilize presentations, videos, student-run campus branches, and workshops to help teach kids lifelong financial skills.