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First Job? Time for Your First Budget


By Richard Barrington, MoneyRates.com

As young adults leave high school or college over the next few months, many will be launching the next phase of their lives by starting their first jobs. Starting wages may not dazzle anyone, but if you want to get the most of them you'll pair your first job with your first budget.

Having a budget might seem like putting limits on your freedom. After all, isn't one of the benefits of reaching adulthood supposed to be having the freedom to spend your money the way you choose?

If you want that freedom, you'd better plan ahead. Without a budget, surprise expenses can arise that dictate how you spend your money, and without a plan, money might not be available for the things you really want to spend it on.

Establishing a budget is liberating because it puts you in control of your finances. In contrast, ask people who have run up debts due to out of control expenses how free they feel. Below are some tips to help you set up your first budget.


1. Don't count on your income until you see it

New workers often wait eagerly for their first paycheck, only to find it disappointing when it arrives. The amount of money deposited into your checking account may be less than you expected.

Take-home pay is often significantly lower than your agreed-upon wage because of various withholding from your paycheck. Employers routinely take money out for federal and state taxes, unemployment insurance and Social Security. If you have medical coverage through work, part of the premium might come out of your pay. Some employers also automatically divert a default amount into a 401(k) or similar retirement fund unless you opt out.

All of which may leave much less left over than you planned on when you and your new employer agreed on your pay rate. For this reason, don't make any spending plans -- and certainly don't take on any significant financial obligations -- untill you've had a chance to see how much take-home pay you actually receive.


2. Start keeping track of your expenses

When you set out to create a budget, it can be hard to anticipate all your financial needs. So, plan for what you can but begin keeping track of how you spend your money. This should help you incorporate anything you didn't expect into future versions of your budget.

Also, as you track your spending, it is a good idea to divide it between discretionary and non-discretionary categories. Non-discretionary items are things you have little choice but to pay for, such as rent, utilities and a basic amount for food. Discretionary items are things you choose to spend money on but don't have to, such as eating in restaurants, entertainment or hobbies.

This distinction can be important on occasions when you need to tighten your spending, because while you can't do much about non-discretionary spending you can focus on discretionary expenditures as potential areas for saving.


3. Remember that student loan payments are looming

If you have student loans outstanding, you may have a short grace period after graduation before you must start making payments. Don't let that grace period lull you into a false sense of security, because those payments might start coming due before you know it.

Make sure you plan for when your student loan payments begin and how much they will be. Make sure you account for all your loans, since students often have separate loans for each school year.


4. Budgets are for saving as well as for spending

Budgeting isn't just a technique for divvying your income up among different expenditures. In fact, one of its most important functions is to help people carve out some of their income for saving.

Right from the start, you should work on saving money in an emergency fund to account for unexpected expenses or gaps in employment. Once you have a reserve of three-to-six months worth of basic expenses saved up you should turn your attention to longer term savings in a 401(k) plan or other retirement plan.

Budgeting for savings should help make sure it isn't crowded out by shorter-term financial demands.


5. Allowances aren't just for kids

At this point, you might be wondering if budgets leave any room for enjoying your money. Absolutely -- budgeting helps you make room for having some fun with your money without going overboard.

Once you've accounted for your regular expenses, you should decide how to split the remainder between savings and money available for you to spend how you see fit. Give yourself an allowance out of each paycheck for the latter. This way, you can spend that money freely without worrying about whether you'll have enough left over for your other needs.

You should be disciplined about following your budget, but acknowledge that things can change over time. With any luck your income will rise, and your spending priorities and savings goals may change.

As your situation evolves, don't let new developments destroy your budget discipline. Simply update your budget to incorporate the new information. After all, you can't expect your first budget to be your last.

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