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Spending

 
By Laura Schaefer
MoneyMix Contributor

Congratulations! You've got your first place, a new job, and money coming in each payday. There's only one problem: It's never quite as much money as you'd like. Managing your own income and finances for the first time can seem overwhelming, but it's essential to get off to a smart start. Creating a "plan to spend" instead of spending without thinking is the key to long-term happiness and short-term calm.

Before you shudder at visions of spending your Sunday afternoons clipping coupons, relax. Building your first budget doesn't have to be difficult or time-consuming. Wendy Chambers, a financial adviser with Chambers Group in Green Bay, Wis., has straightforward advice for new grads. "Get a plan together that will allow you to live within your means," she says. "The plan should have your expected income and expected expenses on a monthly or yearly basis."

fixed vs. flexible expenses

First, list income from all sources. This is the easy part if you have just one job.

Next, list your expenses. Begin with the fixed ones. A fixed expense is one that doesn't change from month to month, such as rent, car payments, or student loan payments. Be realistic—don't underreport. After all, no one needs to see your budget but you.

Ken Ryan, 23, a 2010 graduate of the University of Wisconsin-Milwaukee who now works for a Milwaukee public relations firm, got smart about money very quickly after graduation. "Not to say I didn't watch what I spent during my undergraduate years, but when you're paying your living expenses with financial aid money, students can be careless," says Ryan. "For me personally, that changed in a hurry."

Consider using a smartphone app to keep tabs on your budget.

When you pay your expenses out of your own income, suddenly a budget sounds like a fabulous idea. Work to reduce your large fixed expenses (getting a roommate to reduce housing costs, for example), and you'll have more wiggle room in the rest of your budget.

A flexible expense is one you have a bit more control over each month, like food, haircuts, entertainment, travel, and gifts. Look for places where you can reduce spending on the flexible expenses so you can increase savings.

"I think being aware of those small expenses helps me to watch my spending," says Emily Smith, 24, a 2009 graduate of Loyola University, Chicago, and a logistics and operations coordinator for a Chicago trucking company. "I use [an online website] to track all of my money. I basically have all my accounts linked on this one website that tracks my spending, savings, interest, and so on. I set monthly budgets and it tracks it for me. I receive an e-mail anytime I go over budget. This has been very beneficial."

use budgeting tools

Consider using a smartphone app to keep tabs on your budget, such as Pennies or BillTracker. Another option is Quicken software or a simple Excel spreadsheet. Using one of these is the equivalent of keeping receipts or carrying around a small notebook to record all purchases—just with less paper. Your credit union may offer an app with similar functions.

Regardless of the tool you choose, the important thing is to keep your budget simple. Adjust it regularly and use it each month to keep your financial picture healthy. If you find that you spend more than you make, that's a clear signal of trouble ahead. Work to reduce your fixed expenses—perhaps switch from owning a car to taking public transportation, for example—to avoid financial catastrophe.

pay yourself first

"Pay yourself first is a term used to put aside money for your own savings and/or retirement fund," explains Chambers. It might seem a bit unrealistic to save money each month, but it's never too soon to start.

Carolyn Vidmar, 23, a 2010 graduate of the University of Wisconsin-Madison and an AmeriCorps member in Milwaukee, says, "I definitely think it's important to save. As a recent college graduate in the current economy, I have no idea what's in store in even just the next five years. Hopefully I will continue to be employed, but I know I need to save now for whatever happens in the future."

Despite an awareness of the importance of savings, however, few recent graduates participate in their company's 401(k) savings plans. In fact, a recent survey by the tax information service CCH, Riverwoods, Ill., shows that only 4% of workers younger than age 25 max out their employer-sponsored plan. This is particularly unfortunate because a dollar saved and invested by a 20-something will be more valuable later on than a dollar saved by an older worker because it has more time to grow. Talk to your human resources representative about your company's 401(k) plan and put aside money toward the fund if you can.

needs and wants

Be truthful with yourself about the difference between needs and wants, and you'll spend less on small, meaningless wants like overpriced lattes, and have more money for bigger needs, like a car that actually runs. Elizabeth Warren, White House adviser and co-author of "All Your Worth: The Ultimate Lifetime Money Plan," suggests a 50-20-30 strategy to allocate income. Put 50% toward needs such as rent and transportation, 20% toward saving for retirement and emergencies, and use 30% for wants such as travel and entertainment. Twenty percent might seem like a high savings rate, but it's possible with little tricks and some self-discipline.

Kate Cybowski, 22, who just finished her senior year at the University of Evansville in Indiana and is attending medical school in the fall, says, "In order to be frugal, I suggest not going shopping unless you have a list, and not deviating from your list."

Chambers agrees with this kind of planning. "One mistake that people can make is not being realistic with how much they have to spend," she says. "Another one is not being disciplined with spending and sticking to a planned budget."

As you finish your first budget, include infrequent but predictable items on your list of expenses. You wouldn't want your yearly license plate renewal fee to throw your budget off when it comes around. Other irregular expenses include trips to the dentist, security deposits, flu shots, and car maintenance.

eye on the prize

To make budgeting easier, take the time to picture a specific financial goal. Perhaps you want to be 100% debt-free. Maybe you want to purchase a new car or even retire early. Whatever the goal, keeping it in mind will make your budget feel like a friend instead of an enemy.

Laura Schaefer is a freelance writer and author of "The Teashop Girls" and "The Secret Ingredient," two novels for young readers.

Published September 7, 2011

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