It’s no surprise that many 20-somethings aren’t good with their money. Fresh out of college (or soon to be) with piles of student debt to repay, young adults entering the real world find themselves in a tough financial situation. Having lived through the worst recession since the Great Depression, millennials might be reluctant to invest their money or take financial risks. But saddled with large debt and entering a tough job market, it can be difficult for today’s youth to climb any ladders to financial freedom without a millennial budget plan.
The path millennials take into adulthood will differ from their parents in many ways. Millennials have higher levels of student debt, poverty and unemployment — as well as lower levels of wealth and personal income — compared to Gen Xers and Baby Boomers at the same stage in their life cycle. Parents of millennials want their kids to succeed, of course. The path to success for any young adult — no matter what generation — is a solid foundation in understanding the basics of personal finance. Sadly, lessons about saving and budgeting aren’t always passed down from one generation to another.
Learning how to save starts at a young age
“I was never really taught to budget,” says Candace Manriquez, a 33-year-old radio producer from Long Beach. “I definitely would have benefited from budgeting and saving in my early 20s. I held a job where I made nearly $80,000 and aside from my 401(k), I really didn’t save much.”
Manriquez says she wishes someone had taught her how to budget when she was younger, but with her parents living paycheck to paycheck, she didn’t learn about how to save money at home. A school wasn’t any help either. Though statistics show that students who are taught financial literacy in high school are more responsible when it comes to money, most states don’t require students to take a course in personal finance.
“It’s critical that young adults receive a sound financial education as they make long-lasting decisions about college and how to finance their education,” says Mary Johnson, director of Financial Literacy and Student Aid Policy at Higher One, which sponsored a study on how early financial knowledge influences financial decisions.
Students who receive financial literacy education are more responsible with loans and credit, more financially cautious, and less accepting of debt as a necessity.
Whether you learn about financial literacy through the classroom, at home, online, or through trial-and-error, it’s essential for young adults to educate themselves on the basics of money. One of the first lessons that many young adults need to master is how to create a budget.
“I think budgeting should be taught well before the 20s because preparation is the best thing,” says Kryselle Luna, a 25-year-old bank teller from Las Vegas. “I think in my early 20s I was bad with money. Now I think I’m better, but it is always a constant learning experience as new challenges and opportunities arise.”
So how do you budget?
For 20-somethings looking for a foolproof formula to create their first adult budget, sorry to disappoint, but there is none. There is no one-size-fits-all solution to creating a budget because it depends on what works best for you. In fact, there are several ways that you can approach budgeting.
Some experts prefer the 50-30-20 budget fix, where 50 percent of your after-tax income goes to fixed living costs, 30 percent to fun stuff like vacations and entertainment, and 20 percent goes to retirement and debt management.
Others believe you should go a step further and invest some of your money in the stock market and mutual funds as part of your budgeting plan, if you can handle it. And some experts say you should create multiple budgets that exist on a sliding scale in case you experience fluctuations in your income. That is, you create a regular budget similar to the 50-30-20 plan and then make a big money budget (in case you come across a big windfall) and a bad budget in case something catastrophic like a health scare of job loss occurs.
However you choose to create your millennial budget plan, the important thing is making sure you have one. If you’re looking for some guidance, here are the crucial steps to budgeting that will help keep your spending in check and savings flush with cash.
1. Set your goals
Learning to budget is a crucial part of achieving your financial goals, which is really your ultimate objective. You should have both short- and long-term financial goals in mind before even thinking about your budget. Keep those goals in mind as you allocate money and make adjustments to your budget.
After setting your goals, consider opening an online savings account, which gives you a much better interest rate than a big bank. It’s also free to use and maintain, so it might be worthwhile to start a savings account, if you don’t already have one.
Here are the top online banks that have highest savings accounts rates and free interest checking accounts: