Smart Budgeting and Cash Flow for College Graduates
By Joe Messinger, CFP®
January 21, 2020
Did you have an allowance when you were a kid? Maybe some change or a few dollars if you did your chores? Were you the kid who spent your allowance right away or did you save all your pennies toward some big goal? Some of those habits may have followed you to your adulthood. After graduation, you may find the need to take a moment and think through some smart budgeting and cash flow ideas to maintain your financial health.
What does your post-graduation financial self look like?
We hope you have landed that first job you aspired to when you were just a college student. Now your whole future lies ahead. Don’t panic. Some simple planning can go a long way to improve your life every step of the way. Smart budgeting aims to spend less than you earn. However, we are realistic and know that you’ll face bumps along the way (oops…your car needs new brakes and rotors).
A sound underlying plan can help you work through those unexpected expenses. Let’s think of it as cash flow. Cash flows in, and we control how it flows out. The most important thing you can do is understand how the money flows, have goals you’d like to achieve, and stay on top of what is going on.
All of our expenses can be split into “needs” and “wants.” Needs are non-negotiable figures for the most part and include:
- student loan payments
- health costs and insurance
- savings (emergency fund & retirement savings)
- credit card payments
Emergency fund and retirement savings are not technically a “must be paid,” but we think it should be non-negotiable. Each month, carve off a small chunk to put in your savings to build up an emergency fund.
Trying to figure out how much to save each month for retirement is difficult. Some will recommend 10-15%. Some say at least up to what your employer will match. If your employer will match up to 6% of your 401k contribution, then plan on 6%. If you start saving in a 401(k) from the beginning of your career, you will watch those savings grow and grow through the magic of compound interest. Time is your friend.
As you get raises, increase your contribution by 1% each year. You will be saving 10% plus of your pay by the time you are 30. Again, your future self will thank you!
A smart cash flow plan aims to avoid any credit card debt. Those bumps in the road may have other plans in mind. Think of credit cards as for emergency purposes only and use them sparingly. Use your emergency savings fund when you can. Aim to pay off credit cards quickly by making higher than minimum payments each month, or when you can, paying them off in full each time they come due. (We realize that is easier said then done. Do your best.)
Taxes and health insurance costs are probably deducted from the wages you receive from your employer. You don’t have any control over these costs…just realize they are part of your cash flow.
Now don’t misunderstand us. The items we are putting into our “wants” category are often still things you need–food, housing. Those are definitely needed items. However, you as the consumer have more influence over how much you spend on these expenses.
You have very little say how much your health insurance will cost, but you may have some choices to consider as far as your coverage is concerned. This is a blog in and of itself for the future! One thing to be aware of is that as a young adult, law does allow you to stay on your parents health insurance until age 26. This may be the most cost effective if mom and dad are willing to keep you on!
Unlike you’re fixed expenses, you can control things like how many times you eat out in a week. These expenses are more within our control because they are based on our choices in life.
- Housing (include utilities here: cable, internet, electric, gas, water, sewer, trash)
- Transportation (car and it’s costs like fuel, repairs, and insurance; public transportation)
- Food (groceries and dining out)
- Personal care (clothing, health club, toiletries, phone)
- Pets (food, medical, grooming)
- Entertainment (sporting events, movies, music)
Don’t want to go line by line to track all of this?
Our friends at Student Loan Hero suggest grouping expenses into categories and using certain percentages of your take home pay to figure out how much you can afford to spend in each. Housing, including all that goes with it, is capped at 35% of your monthly income. Transportation is capped at 15%, savings 10%, debt payoff 15%, and everything else the remaining 25%.
Using these percentages as a basis, you can make choices about where to live, what kind of car you’ll drive, how often you go to the movies, and so on. Being aware of where the money is flowing every month to is vitally important to staying on top of what is going on in your financial life. Plus, it is a good idea to set up your bills to get paid automatically each month, and you can set up automatic deposits to your savings account so you don’t have to think about it. Automating your money and putting it on autopilot is powerful thing! Just make sure you are checking in at least once per week.
If you are looking for a way to track your budget you may want to consider some free online tools that can help you. One popular tool is Mint.com. You can link all of your different checking, savings, credit cards, student loans, mortgages, and more. You can see everything in one place and use the technology to help keep you on track without always logging in to all of your different providers.
Have a goal in mind.
It can be a big goal like buying a house, getting married, or having children. Or it can be little goals along the way like going on a nice vacation. Having a goal will give you the motivation to practice smart budgeting and keep an eye on that cash flow each month. Reducing your debts and saving as aggressively as you can early in your career will go a long way to getting you to those big goals down the road.