To go from a Millennial to a Millionaire you need to invest in the stock market among other things, but even before that you need to start with a budget. A budget helps you manage your hard-earned money. You’ve got student debt, a car loan, rent and saving for retirement that you need to account for to meet all of life’s demands knocking on your door. A budget will help you prioritize your financial goals, plan them out for success and protect them from anything that may get in your way of achieving them.
I’ll show you how to create a simple budget that you can use starting today to get a hold of your money, based off of my own budgeting experience. I made sure to start a budget right out of college so that I could achieve my financial goals, which at that time were 1) pay for my housing needs, 2) save for retirement, and 3) pay off student loans and still have enough to save some more and to enjoy myself in my early twenties!
As I mentioned in last week’s post on how to get your 401(k) beach ready for the summer, my first recommendation was to create a budget, specifically to fit in retirement savings, but that is just a piece of the whole. With a budget you can fit in many allocations that you need to spend and save on. There are many budgeting methods out there, but I use percentage budgeting for after-tax income because of its simplicity. With this method, you allocate a percentage of your spending and saving to categories of your choosing.
Here’s how you can budget to keep it easy:
- First, housing is the biggest expense so spend no more than 35% on rent, utilities and insurance – or even a mortgage if that’s where you are!
- Second, work your way up to (ideally) tucking away 15% for retirement savings.
- Third, the remaining 50% is yours to save and spend, such as towards paying down student debt, emergency savings, car expenses and entertainment.
Let’s say you make $47,000 per year, like our friends Eve and Adam. This translates roughly to $3,917 per month (= $47,000/12). With this income, you are in the 25 percent federal marginal tax bracket. And assume you incrementally raised your 401(k) contribution rate to 15 percent.
Gross pay tax & deductions
- Gross pay: $3,917
- Tax (25%): $979 (= $3,917 × .25)
- 401(k) contribution (max 15%): $588 (= $3,917 × .15)
- Net pay: $2,350 (= $3,917 − $979 − $588)
So you have your net pay to work with your monthly budget.
Net pay budget
- Housing (35%): $822 (= $2,350 × .35)
- Student debt: $272 (which is around 11.5 percent of net pay)
- Remaining expenses: $1,256 (= $2,350 − $822 − $272)
What does this mean?
My budgeting philosophy is based on my own adage that “as long as you can pay your bills and pay for your retirement first” then the rest is up to you on how you want to spend/save it, but make sure to apply the remainder to paying down student debt at the very least – and don’t get into credit card debt either! I believe that if you pay for yourself today (i.e. your rent, utilities, etc.) and pay yourself for tomorrow (i.e. retirement savings) than that will create a steady financial foundation that will keep you out of bad debt, like credit card debt, and provide you with the financial security you need in the future.
Here’s how you can make sense of what these numbers in the example budget mean:
- Housing: You can’t live in an apartment, along with utilities, that’s going to cost you more than $822/month. That may mean you can’t afford the new commercial complex with all the amenities and rooftop pool! Instead you may need to find an affordable studio or live with a roommate.
- Retirement: Tuck away at least $588/month into retirement savings, preferably starting with your 401(k) – and hopefully there’s an employer match! See how little 15% of your salary seems in the grand scheme of things? At only $407/month, you’ve already hit the max recommended retirement savings amount!
- Student debt. Calculate your monthly payment and bake the amount into your net pay budget.The US government’s standard repayment program gives you 10 years to pay off student debt. The good news is let’s say you went to a public 4-year university, you’ll probably have about $30,000 in student loans. That translates to around $272 a month, for 120-month repayment. In this example, make sure to pay $272/month or more.
- Remainder: You then have $1,256 to do as you please. You can use this to increase student loan payments, or to start an emergency savings fund!
See, with the budget in place you meet your financial obligations (rent, retirement and student loans) with ease and you have a good amount of money left over to do as you want! And as you advance in your budgeting, find ways to cut out excesses, such as buying coffee in the morning, eating out for lunch at work every day and paying expensive gym memberships and too much for your cable bill. Constantly look to slim down theses costs in your budget!
My primary focus is on DIY investing. And that is because the way to propel yourself from a Millennial to a Millionaire is through putting money into the stock market, which return 8% over the long term. When you invest, you give up your capital today with the expectation that investing in private enterprise will give you money tomorrow (tomorrow as metaphor for the far-off future, like over 30-40 years). But to get there budgeting is really the first step to your financial empowerment and freedom.
Start budgeting today!
Follow me on Twitter @MatthewKMiller.
Want to learn more? Pick up a copy of my book …
From Millennial to Millionaire: DIY 401(k) – 5 Do-It-Yourself Steps for the Digital Generation to Design and Manage their 401(k) on Amazon.