Millennials spending habits are very different from older generations. This generation is more likely to spend money on experiences over a tangible physical product. Millennial shopping habits also trend more highly with making online purchases, and they tend to eat out more often.
Due to these millennials spending habits, the generation is often stereotyped for spending frivolously. However, this generation has debt disproportionately due to student loans, and their financial burgers are greater. The cost of education and buying a home has increased significantly for millennials, while wages haven’t caught up.
As a result of this, many millennials are living paycheck to paycheck. Many millennials know that saving money is integral to getting out of this cycle and reaching milestones like buying a home and retirement. Financial budget planning makes it easier to find and put away money to reach these goals. The millennial personal finance journey starts with preparing a budget that works.
How to Start Budgeting
In particular, budgeting for millennials may not seem easy with the overburden of debt that this generation has accumulated. But financial budget planning is a necessary tool to improve your financial situation. Your finances will take time and effort to improve, and it all starts with a simple monthly budget to get you on that path. To start budgeting, use these six steps to create a budget successfully below.
Step One: Calculate Your Monthly Income
When preparing a budget, you’ll need to know how much money you’re bringing in every month. That’s your take-home pay which doesn’t include your health insurance premiums, retirement savings, income taxes, or other deductions. You’ll account for those later.
With this accurate view of your income, you’ll know how much you have available to spend each month. Of course, your goal is to spend less than this amount.
If you have other income sources, such as a part-time job or side gig, you could include this income with your net income. Keep in mind that means you’ll have to keep these income sources going if you make it part of your budget. Another option is to keep this income out of your budget. You can use the money at the end of the month to help pay down debt or invest.
To create a simple monthly budget when you’re self-employed, you’ll want to look at the last six months of income. Use the smallest amount that you’ve earned during that period. That way, you’ll be more likely to come in with more money than less on your budget.
Step Two: Calculate your Expenses
You’ll need to make a detailed list of your expenses to come up with accurate numbers here. Looking at your checking account and credit card statements over the past six months is the best way to do this. Your expenses will fall into two types of expenses:
- Fixed expenses – Your rent/mortgage, car payment, insurance premiums, and other debt payments will generally go into this category. These are costs that you will have no matter what.
- Variable expenses – It may include necessities like gas, groceries, utilities, and optional costs like dining out, trips, cable, streaming services, and entertainment.
Now you can start to find expenses to reduce or completely cut out. These things will usually fall under the variable expenses categories since you have more control over these costs. For example, you can cut your cable, reduce the number of streaming services you subscribe to, and choose to lower your grocery bill.
Don’t ignore your fixed expenses, though. If you purchased a home several years ago and interest rates are drastically lower, you lower your mortgage payments by refinancing. Or you could live in a cheaper place or get a roommate to share your housing costs.
Step Three: Select your Budget
A budget system that works for you will be the key to your budget success. One strategy is not better than the others. It comes down to your personal preferences and chooses the one that works best for you.
You can also modify the budget plan to work with your preferences or goals too. We’ll discuss some of these popular budgeting strategies in a different section.
Step Four: Track Your Progress
Once you’ve got your budget together, it’s time for the hard part – Tracking it. Keep track of your budget by keeping up with your expenses. You may find this easier to do with a mobile app (some even sync with your accounts) while you’re out and about.
Otherwise, you could keep a notebook to either track your expenses or update your budget. Another option is to use a spreadsheet that you update at least weekly with all your expenses.
Don’t feel deflated if you find yourself going over your budget. It’s probably going to happen as keeping a budget is a new habit. You might have had an unexpected expense, find that you’re spending more than you thought in specific categories, or didn’t account for an irregular expense such as Christmas presents. Learn from it and move on.
Step Five: Adjust as Necessary
One of the reasons that budgeting fails for some millennials is that it’s a static process. Millennial personal finance needs, just like other generations, will change. You’ll have to make changes to get results as your life changes.
Once your financial situation improves, it’s typically time to review your budget. For example, you might have been focused on reducing your debt, and once you’ve become debt-free, you’ll need to modify your budget. That money that was used to pay down debt can now be put towards increasing your emergency savings or retirement funds.
Step Six: Use Extra Funds toward your Goal
It’s tempting to spend money that’s leftover from your budget. But make the most of these funds by using them towards your goal. Whether it’s a savings or debt goal, the money is best used for these purposes.
The purpose of a budgeting system is to drive your financial goals. Each of these systems uses a different method to get you there. Some may work better for certain goals than others. But ultimately, it’s about choosing the one that works with your lifestyle. Here are some budgeting methods to consider.
This budgeting system takes your income and splits it into three big categories: 50% is for necessities, 30% for wants, and 20% toward savings and debt repayment. Many people like using this budget rule because you don’t need to worry about having detailed budgeting categories. It allows you to focus on the big picture instead.
To identify the necessities versus the wants in this system, look at it like this: Your wants are things that you don’t need to live your life: entertainment, eating out, cable, and shopping.
The necessities are:
- Your housing.
- Minimum payments on your debt.
- Basic clothing and items for a living (groceries, personal care).
You can use the savings and debt category to set aside money for the future or pay off debt faster. You can reduce your wants to save more money that can then be used for extra savings.
Let’s say that your income is $5,000 per month. Using this rule, you will have $2500 for your needs, $1500 for wants, and $1000 for savings and debt.
Another popular budgeting method is zero-based budgeting. You put every cent of your income into use with this budgeting system. Often called the zero-sum budget, your money is allocated into expenses, savings, and debt payments. By the end of the month, the goal is that your income minus expenditures equals zero.
This system is much more detailed than the 50/30/20. You’ll have to categorize your expenses, including needs, wants, debt, etc. And if you’re going to plan a family vacation, you’ll have to create a “vacation” fund. Now, the neat thing about this zero-based budgeting is that you can use the 50/30/20 system as a basis of how much money goes into those bigger categories.
It’s diving much deeper, which allows you to control your expenses. You can also identify areas where you’re overspending much easier using this method. Make sure that your account for irregular expenses like going to a wedding, anniversary presents, etc. Here is an example of how a Zero-Based Budget could look using a monthly income of $5,000:
- Mortgage: $1500
- Utilities: $200
- Groceries: $450
- Insurance: $150
- Shopping: $200
- Dining out: $100
- Entertainment: $200
- Gas: $200
- Retirement: $350
- Savings: $300
- Investments: $300
- Credit Card Payments: $250
- Student Loan Payments: $250
- Car fund: $250
- Vacation: $300
“Pay Yourself First” Budget
The idea of paying yourself first budget is, you start by setting aside all your savings at the beginning of the month. You can allocate the money based on your savings goals like retirement, emergency fund, new car, etc. Additionally, you can put money upfront toward debt repayment (since getting out of debt gives you “more” money).
Once you have put your dedicated allotment towards your savings goal, you can spend the rest of your money however you want. The thing is that you can’t use any money that is allocated in savings. If you’re going to make saving a priority, this method may be the ideal choice for you.
Budgeting for Millennials and Success
Millennial shopping habits often get a bad rap for this generation’s financial problems. But using a budget allows you to identify and curb these spending habits. Here are a few other tips to help make budgeting a success as a millennial.
Have Flexible Goals
As mentioned, a budget is not something that’s meant to be set in stone. It’s fine to create a new budget whenever things change, even if that happens every month. Your budget should be a realistic view of your current financial status.
For example, let’s say that due to the COVID-19 pandemic, your costs for daycare, gas, and eating out have plummeted. Use those savings and put them into other areas like paying down debt or a child’s higher education.
Make Building an Emergency Fund a Priority
Every personal finance guru talks about this. And many millennials, as well as other generations, saw the importance of this with the pandemic. You need to have back-up funds in case you lose your job, have a health emergency, or another unexpected event occurs. Being prepared for the unpredictability of the future will get you through these tough times.
Start with a small goal like saving up enough to carry one month’s expenses. Then start working your way up, month by month. Ideally, you should have between six months to a year of expenses saved up. It takes time and patience, but once you’re there, it’s a load off your mind.
Make Saving Automatic
Automating your savings as much as possible will make it effortless to reach your savings goals. Set up automatic transfers every time you’re paid so that a portion of those funds go into a separate account. You can’t spend what isn’t readily available. Plus, it’s one less thing you need to worry about every month.
Get a Side Hustle or Job
Plowing as much money as possible into paying toward debt or savings is easier when you have more money. Using that additional income to boost your savings potential not only gets you to your goals faster but could also fuel your passion. For example, if you love creating homemade crafts, you can use that skill to sell on Etsy or local events.
Pay off Your Debts
Having student loans or credit card debt leaves you with less money that can be used for other financial goals. The interest costs alone will make you feel like you’re throwing money away. Stop accumulating debt by using credit cards and only paying the minimum or part of the balance.
Use the debt avalanche or snowball method to accelerate your debt repayment. The debt avalanche method involves making minimum payments on all your debt and focusing on plowing money into the debt with the highest interest rate. Once that debt is paid, you move on to the next highest interest payment.
Conversely, the debt snowball method focuses on paying off the smallest amount of debt first. You see faster progress with this method which can help you stay focused on your goals. You save money on interest using the debt avalanche method. But ultimately, the best approach is the one that you stick with.