Budgeting for young adults: 4 simple steps to get your finances in order

Steps to Budgeting for Young Adults

If you’re in your 20s and managing finances on your own for the first time, follow these steps to plan your budget.

1. Look at Your Income and Spending

How much money do you make each month? You can’t make a budget without knowing how much money is coming in, so start here. Add up the income you earn from jobs, side gigs, investments, gifts and benefits each month to see what you’re working with. If you earn an irregular income, find an average across the past three, six or 12 months (however long you’ve been earning the way you do now). You can always adjust later when you’ve got more months of data to get a more reliable average.

Then do the same for your spending. Look at your bank account and credit card transactions to see where your money goes each month, finding an average of the past several months.

Enter your monthly spending into our Spending Forecast Calculator to get a clear picture of where you spend the most, including:

• Housing.
• Loan repayment.
• Insurance premiums.
• Utility bills.
• Other spending (food, entertainment, clothing, transportation and more).

Compare your total spending to your total income to see how balanced they are. If your spending is much higher than your income, you might be accruing debt. If your spending is much lower, you might want to consider focusing on building savings .

If you don’t like the balance between your income and spending, use the visual forecast to see where you have room to adjust your spending, and use your income list to see where you could adjust your income. If you’re short, see if there are expenses you can cut without causing too much discomfort, like streaming services you don’t use, or an over-reliance on food delivery with high fees. If you’ve pared down your expenses and the budget is still tight, see if you can pick up a side gig you can do remotely, or maybe even start a small online business. 

2. Create Savings Buckets

Once your income and spending are in balance, look toward your financial goals. Create savings buckets to support your short-, medium- and long-term goals. You can open a separate account for each goal to avoid mixing your funds.

Some savings buckets might include:

• Emergency fund in a money market account.
• Travel fund in a high-interest checking account.
• Savings for a home down payment, a wedding or a first child in a high-yield savings account. Yes, these may be far in the future, but it’s easier to save a little at a time than having to save a big chunk in a short time when you’re ready to take one of these steps.
• Long-term savings in investment accounts, including a 401(k)/403(b) or IRA for retirement. Even if you’ve got many decades left until you retire, starting a retirement fund or contributing to your employers’ plan may help you use an asset you have in your favor: time. Compounding interest is your friend, so every dollar you can save in your twenties may grow a lot by the time you’re ready to retire.

Naming your financial goals and designating an account for each — even if you don’t set a target amount for them yet — gives your money purpose. Knowing what your money is for can motivate you to reach your income goals — it may be a lot easier to get through the work day when you know exactly the future your paycheck will help you build.

3. Set Debt-Payoff Goals

Once your current and future spending is taken care of, look toward taking care of past spending that accumulated debt. Do you have credit cards, auto loans, student loans, or other outstanding debt you want to work to pay down faster?

Most of your debt probably comes with monthly minimum payments, which you already listed as part of your monthly spending. If you’ve got extra money to put toward financial goals, putting it toward your debt may help you avoid accumulating interest and pay off the balance sooner.

You may prioritize your debt in one of two ways:

• Pay off the lowest balances first to get the debts out of your life.
• Pay off the accounts with the highest interest first to save the most money.

Also consider other characteristics of your debts that could help you decide which to pay off first — like, student loan relief that effectively eliminates interest, mortgage insurance you no longer have to pay once you’ve paid off enough of the loan or introductory credit card rates that disappear after a number of months.

In most cases, you may likely want to make extra payments toward debts in this order of priority:

1. High-interest credit card balances.
2. Auto loans and other collateralized debt.
3. Unsecured personal loans.
4. Private student loans.
5. Public student loans.
6. Mortgage and home equity loans.

4. Adjust Regularly

The most important thing about budgeting for young adults (or really anyone at any age is to stay flexible). Many can’t make a single budget and live on it for the rest of their life. Paychecks may get bigger (or smaller!), new life circumstances will arise. You may decide you really want to focus more on travel, or even take a year off. Whatever you dream of is possible… with the right planning. 

Your income may likely change a lot over the next few years as you learn and try new things in your career, so you’ll need to rebalance your budget as that happens. Your tolerance for certain circumstances, like living with debt or without an emergency fund, may likely change as you age and your life circumstances change, too. That’ll make your financial goals a higher priority than they might be when you’re first getting started.

Check in on your budget monthly for a while. Once you’re confident you’ve got the numbers right, you may want to revisit it at least every three months to adjust the amount you put toward savings and debt. You’ll also want to look again to see if there are unnecessary expenses to cut and fresh ideas to bring in some cash. 

Budgeting for young adults maybe easier when you take a look at our Spending Forecast Calculator. Try it out!