Living On Your Own - Budgeting
"When I lived at home, food, toothpaste and 'the necessities' just kind of appeared. Now that I'm in college and living in an apartment, I have to budget my money for tuition, books, rent, food - everything." Tom B., engineering major. Handling Money on Your Own:
Many high school graduates look forward to being out on their own and living life on their terms. Some of you may move out from your parents' home to attend college, while others may leave to start a career and earn an income. Whatever your motivation, the end result is the freedom you'll experience from having "your own place."
But that independence comes with a price tag: living expenses. You have to be able to pay for a roof over your head, food to eat, clothes to wear, and gas for your car. Since you probably aren't independently wealthy, i.e. rich, you have to be wise and plan how you will spend your money. By preparing for "life on your own" now, you'll be ready when the day comes to move out.
A spending plan is one of the best planning tools available to manage your money. A spending plan simply is a plan showing how you intend to use any money you expect to receive. It is composed of two main categories, income and expenses. Income is money you earn from a job or receive as a gift. It may help to think of it as "cash inflow," meaning money that flows into your control.
As a teenager, your major source of income probably will be from a job. You may get cash gifts from family members, as well. Later on as an adult, you'll find there are other sources of income, like interest and dividends, which come from investments such as certificates of deposit and mutual funds.
Expenses, the second main category for a spending plan represents "cash outflow." Any time you spend money, that's an expense. Since most teens living on their own spend money on a lot of different things, it's helpful to categorize expenses in more general terms. Here are some typical categories:
- Housing. You need a place to live, whether it's a dorm room or an apartment. In nearly all cases you'll pay rent to live there.
- Utilities. Having a place to live is one thing, but it takes electricity, water, and maybe natural gas to make your space livable. You also may have to pay for some type of trash service. Some apartment rental plans include the cost of these basic utilities, while others don't. In addition, if you have a landline and/or a cell phone, you'll need to budget for that as well.
- Debt Payments. If you have a car loan or perhaps a student loan for college expenses, you probably will need to make monthly payments on these loans. If you owe money on a credit card, the monthly payments you make belong in this category.
- Personal Items. Clothing often is a big expense, especially if you need to buy clothes that are appropriate for a new job. Haircuts and manicures fit in this category, as do services like dry cleaning.
- Savings. Living on your own is a great time to start good habits like "paying yourself first," also known as "P.Y.F." Putting money into some type of savings account on a regular basis can benefit you in many ways. First, if you ever have a financial emergency, like an expensive car repair, money in savings can come to your rescue. Second, knowing you have money in savings also means you can take advantage of a good opportunity, such as when an item you really want to buy goes on sale. Third, saving for long-term goals now will make them happen that much sooner in the future. Maybe you want to buy a new car, go to college, travel to Europe, or own your own home some day. Saving money on a regular basis now is the starting point to fulfilling your dreams.
- Food. Ya' gotta eat. Eating out is more expensive than fixing your own meals. So you may want to break this expense into two categories—groceries and dining out.
- Transportation. You need gas, oil, and tires among other expenses to make a car run reliably. Or, if you take public transportation, you'll need money to pay the fares.
- Insurance. If you own a car, insurance is mandatory in just about every state. If you live in an apartment, you also might want renter's insurance to protect your personal property in case of fire or theft. If you're working, your employer may offer health insurance as a benefit; it usually is the cheapest way to get medical coverage and well worth the cost if you're ever sick or injured. If you're not working, it's a good idea to budget for the cost of an individual health insurance policy. Even though you are young, and probably healthy, the cost of a medical emergency or long-term illness can be devastating!
- Household furnishing and supplies. You may need to purchase furniture, unless your apartment or house already is furnished. Keep your eye out for yard sales, and shop around at your local thrift stores. Also, don't forget you may need to purchase items such as a vacuum cleaner, a mop, and household cleaning supplies.
- Taxes. Don't forget that taxes will be deducted from your income. So while you may be making $12 an hour, your actual take-home pay will be less. For more information on taxes, link to the Fast Financial Facts section.
- Luxuries. Cable TV, entertainment expenses, such as concerts and movies, magazines, and CDs fall into the luxury category. These are expenses you can do without, but they certainly make life more enjoyable when you can afford them.
As a general rule, try to save about 10 percent of your before-tax income regularly. "Paying yourself first" is a great habit to develop. Housing, which is typically the biggest expense for most people, should not exceed 30 to 40 percent of your budget. No more than about 20 percent of your budget should go to debt payments.
Note: While savings is not included in the budget above, we highly suggest you include it in yours. This budget is a general guide for individuals age 25 and under.
This article is reproduced from the National Endowment for Financial Education (NEFE).
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