12 Essential Budgeting Tips for Young Adults

When you're young, the future is full of endless possibilities. Whether your dream is to travel the world, start a family, excel in your industry, or pursue higher education, it's important to consider the practical and financial path to achieve your goals. Your ability to handle your personal finances could impact the extent of your success. Here are 12 essential budgeting tips for young adults.

1. Track your spending

Before you create a budget, it’s a good idea to understand where your money is going. Your monthly living expenses will include necessities, like rent, groceries, and gas. Additionally, you may have other costs in the same month, such as booking an Airbnb for your next vacation, paying for a dress or tux rental to be in your friend’s wedding, or taking your cat to the vet.

Unless you have a photographic memory, it may be difficult to remember every expense in any given month. To help track your spending, consider using a spreadsheet or budgeting app to categorize your expenses. Having an idea of where your hard-earned dollars are going can help you identify your spending habits and areas where you may need to cut back. 

2. Try a budget plan that works for you

A budget doesn’t have to be rigid; it should be flexible to your needs and lifestyle. Luckily, there are a variety of budgeting tips and strategies that will help you manage your finances. Once you find a budgeting style that fits your unique financial situation, try to stick with it. Here are a few common budgeting methods:

Zero-Based Budget

A zero-based budget allocates every dollar of your income to a specific purpose. This method involves paying regular expenses as usual. If you have money leftover at the end of the month, even as little as $27, that amount should be allocated. Rather than eating out or buying a new top, consider adding the extra cash to your house fund, retirement account, or emergency savings.

50/30/20 Budget Rule

Another popular method among young adults is the 50/30/20 Budget. This budgeting guideline instructs you to distribute 50% of your after-tax income to needs, 30% to wants, and 20% to savings. It’s especially useful for college students or individuals whose income varies each month. By assigning set percentages to your monthly expenses, you can work towards your financial goals while also enjoying the present.

Envelope Method

The envelope method involves dividing cash into envelopes labeled with different spending categories. For example, if you allocate $300 a month for groceries, you would place $300 in the "Groceries" envelope. You then spend from the envelope throughout the month. Once it’s empty, you stop spending in that category for the month. This method helps control overspending by providing a physical reminder of the money leaving your hand.

3. Set financial goals

Just as you may have educational or career goals, it’s important to set goals for your financial future. Whether you envision owning a bakery or scaling Mount Kilimanjaro, these dreams require planning and effort. Achieving your long-term financial goals begins with setting smaller, more achievable milestones.

With the mountain trip example, you could set smaller goals for covering flight costs, accommodations, acquiring gear, and obtaining a passport. Consider trying a few fun money savings challenges or set aside a portion of your paycheck to gradually save up for those expenses. Much like climbing an actual mountain, reaching your vacation savings goal may take time and dedication, but the sense of accomplishment will be worth it.

4. Start an emergency fund

Life is full of surprises, so it's smart to have a financial cushion for those unexpected moments. Whether it's a car accident, a family crisis, or a sudden job loss, you never know when you might need extra funds. According to a 2023 survey, only 63% of U.S. adults could cover a $400 emergency expense using cash or a debit card.

While you can't foresee every challenge, you can prepare for them by building an emergency savings fund. Even as a young adult, setting aside small amounts can help you create a financial safety net. Taking proactive steps with your money brings peace of mind and reduces financial stress during challenging times.

5. Prioritize paying off debt

When it comes to managing your debt, whether it's student loans or credit card balances, prioritizing repayment is critical. After graduating from college, you typically have a grace period before student loan repayments kick in, but preparing to make payments in advance is wise. For credit card debt, paying more than the minimum payment due is recommended, as high-interest rates can add up quickly.

By staying consistent and by making your loan payments in full and on time, you can boost your credit score. While there may be instances where saving money takes priority over paying off debt, overlooking even a small amount of debt can lead to significant financial challenges in the future. To stay motivated, remember to acknowledge and celebrate each financial achievement – no matter how small.

6. Practice money-saving habits

When you’re solely responsible for covering all of your expenses, you start to appreciate why your parents or guardian would always say, "We have food at home," or "That's a want, not a need." Even for one person, the cost of living can be quite high. Incorporating these money-saving tips can help you reduce a few of your expenses.

While paying for utilities is a must, you can regulate the thermostat and turn off the lights when they’re not being used. Reducing the number of times you eat out can help trim your food expenses. Additionally, clothing is a necessity, but you can shop at thrift stores, during sales, or utilize student discounts to save some cash. Whichever saving methods you choose, always compare deals to find the best available options.

7. Make big changes in moderation

Your financial situation won't magically improve overnight. You need to take small steps to get where you want to be. If you don’t have a budget, create one or use a template. If you want to start saving, automate a small portion of your income to your savings account. If you have a habit of dining out several nights each week, don't try to eliminate the habit all at once. Instead, try limiting your takeout to just two or three nights a week. 

By picking a more attainable goal, you’ll get some quick wins under your belt. These short-term goals in turn will motivate you to keep up your new frugal habits. Just like sticking to a healthy diet or an exercise routine, establishing good money habits should be done in moderation, all while keeping your long-term goals in mind.

8. Find ways to increase your income

While reducing expenses is helpful, there is a limit to how much you can cut back. Sometimes, increasing your income is necessary. You can address your limited income in creative ways, like tutoring online, freelancing in your area of study, or adding another creative side hustle.

However, boosting your income is not just about earning more money. It is also about diversifying your income sources. This way, in case of job loss or injury, you will still have some money coming in. No matter if you're working full-time or part-time, there are ways to increase your income, even if your motive is just to have more spending money.

9. Protect your health

When dealing with your finances, your mental and physical well-being are easy to overlook. Try to stay active and eat healthily whenever you can. Not only are health complications mentally and physically taxing, but they could also put a massive roadblock in between you and your financial goals. By looking after your wellness now, you can reduce the risk of facing preventable medical bills and hospitalizations later down the road. 

In addition to living a healthy lifestyle, it may be wise to consider health insurance. Even something as minor as an accidental sports injury could end up costing you thousands of dollars if you’re uninsured. As accidents can happen to even the healthiest of people, you shouldn’t skip out on medical insurance coverage. In some cases, it may be offered through your employer.

10. Get familiar with taxes

When you land your first job after college, you may be excited about your new salary. But you have to remember that the number you earn is not what will be deposited into your bank account. Before anything else, federal and state income taxes will be deducted.

Make sure you understand how taxes work and adjust your life accordingly. Don’t worry; if you pay the government too much money, you’ll get some money back in the form of a tax refund. It’s a good idea to talk to a tax professional if you have questions or need help. 

 11. Remember your retirement plan

Because retirement can feel so far away, making contributions to a retirement plan can feel pointless. However, saving for retirement is an important step towards financial stability after college. If you’re fortunate enough to work for a company that offers retirement plans with employer matching contributions, it’s in your best interest to take advantage of it. 

For example, if your salary is $40,000 and your company offers 6% matching with their 401(k) plan, your employer will match your contributions up to $2,400 each year. This means if you decide to contribute $200 a month towards your 401(k), your employer will also contribute $200, assuming your employer offers a dollar-for-dollar match. At the end of the year, your contributions would equal $4,800 ($2,400 from you + $2,400 from your employer). By taking advantage of your specific plan, you can boost your monthly retirement savings, allowing you to accumulate wealth more quickly.

12. Keep educating yourself about money management

Once you have a good handle on managing your money, you should continue to increase your knowledge of personal finance. You can gain more knowledge from reading personal finance books and blogs, listening to podcasts, following financial literacy pages on social media, or meeting with a financial advisor.

When you’re well-versed in one area of finance, challenge yourself to learn another. There are plenty of resources to help you start investing, build credit, learn how to talk to your partner about money, and other helpful topics for your future. By continuing to educate yourself on money topics, you’re setting yourself up for future financial success. 

Similar to mastering a sport or art technique, becoming proficient in budgeting requires consistent practice, and starting early can be beneficial. In your youth, your finances have more time to accumulate compound interest and grow. With a proper budget, you’ll have more freedom to do what you want to, like starting that bakery, buying the house of your dreams, or finally making it to the peak of Mount Kilimanjaro. So, here’s the bottom line: the sooner you start saving and investing for the future, the sooner you may achieve financial independence and pursue both your short and long-term dreams.