How to Build Your First Budget

By Liz Pulliam Weston, © 2007, MSN, www.msn.com

Angelica Trummell, 22, just graduated from college – and went off the parental dole. Like millions of other college graduates, she's trying to figure out how to make ends meet now that Mom and Dad won't be sending checks every month.

It's not that her parents paid for everything. The art-history major worked for the campus bookstore at University of California, Riverside, and took out $10,000 in student loans to help pay the bills. She also racked up $2,000 in credit-card debt.

But facing life now that she has to foot the entire bill for rent, food, utilities, insurance and debt payments is more than a little daunting.

"A lot of my friends are going back home" because they can't afford post-college life, Trummell said. "I really don't want to do that."

Why you should care about budgets

Putting together a post-college budget is crucial if you don't want to spend your way into serious problems. You're also developing a habit that can serve you well throughout your life.

"You're committing to managing your money instead of letting your money manage you," said economist Kathy McNally, head of financial literacy for the National Foundation for Credit Counseling. "The earlier you start, the better."

You'll probably find it helpful to first track how you're spending money now. Review one of your recent bank statements to get an idea of your current monthly expenses and your monthly take-home pay. Then track every dime you spend for the next three or four days to learn where your discretionary money goes.

OK, now what?

What your budget looks like will depend on many factors, including what area of the country you live in. People in urban areas tend to spend more on housing than their country cousins, for example, while utility costs will be higher in the Northeast and Midwest than in balmy California.

The simplest way to budget may well be "The 60 Percent Solution." The basic idea is that all your "essential" spending – taxes, food, shelter, clothing and the rest – comes out of the first 60 percent of your total, pretax income. The rest, in 10 percent chunks, is devoted to retirement savings, emergency savings (or debt repayment), short-term savings for irregular expenses (like holidays and car repairs) and fun money.

New college grads, however, may find essential spending chews up more than 60 percent of that total pay. You also may need more specific guidelines, particularly if you're still trying to decide how much to spend for rent or a car. So here are some reasonable budget figures, provided by Springboard credit counseling service, which are based on net take-home pay:

Three lower-income budgets

Source: Springboard

 *If your employer doesn't provide full medical coverage, you might need to add another 8% to 15% to take care of those costs. Trummell, for example, will pay about $140 a month for an individual medical insurance policy.

What if the numbers don't add up?

If you've done and redone your budget and you're still spending more than you make, then it's time for some radical rethinking. Here are the most likely culprits:

• Housing: You'll notice this is the single biggest expense you face, so some cuts here can really make a difference. Consider getting another roommate, renting a room from a family or even moving back with your own dear parents if you can't get this expense in line. Don't worry: it's not forever. Eventually your income will increase, and you'll be able to afford better digs.
• Transportation: If you have a car loan, you may have already busted the bank in this category. Even an economy car costs about $500 a month, said Springboard President Dianne Wilkman, including payments, insurance, fuel and maintenance. If you bought more car than you can afford, consider selling it and buying something less expensive or opting for public transportation.
• Food: Basic groceries should cost a single person about $150 a month. You'll spend a lot more if you eat out frequently, however, or if you buy lots of processed foods, frozen dinners and gourmet stuff. Cut your food costs by bringing lunches and snacks from home. Substitute potlucks or picnics for expensive socializing at restaurants. Shop grocery-store sales, and learn to make a few healthy meals at home.
• Utilities: A cell phone, a big long-distance bill or a need to walk around your apartment in shorts in January can all put you over budget in this category. Shop around for cheaper long distance. Conserve energy and wear a sweater in the winter, shorts in the summer. Consider getting rid of your land line, or at least switching to a cheaper plan.
• Personal: Let me guess. You're waaaaaay over budget in this category. The good news is that just about everything in this group represents a want, rather than a need. That means you can easily trim out the fat: Disconnect your cable, or at least switch to basic; ditch the gym; find a cheaper haircut; carry (and spend) less cash; and stop smoking.
• Savings: You might have to temporarily trim this percentage to pay off credit-card debt. But don't cut savings to spend on anything else. And make sure, if you're eligible for a 401(k), that you contribute as much as you can, but at least enough to get the full company match.
• Debt: If you're like the average college graduate, you've got about $18,000 in student loans and $2,000 in credit-card balances before you even get your first paycheck. Just making the minimum payments in this category can put you over budget.

There are several steps you can take to keep these debts from wreaking havoc on your budget. First, consider consolidating your student loans to lock in low rates. That $18,000 could cost you just $134 a month if you lock in the 4.06 percent rate for 15 years.

You might also talk to your lender about other options, such as interest-only or income-sensitive plans. If you're really hard up or unemployed, you can ask for a deferral or forbearance, but remember that your interest usually will keep piling up even if you don't pay. This is why it's usually best to pay something each month, although student loans are one debt where it's often OK to just pay the minimum. 

That's not true with credit-card debt, however. You always want to pay more than the minimum if you possibly can. Otherwise, the interest charges and fees will just keeping adding up, and you may never get out of debt. Consider taking money from savings and trimming every other budget category, so you can get credit-card balances eliminated in a hurry.

If you're still having trouble, or if you can't pay the minimums on your debt, consider contacting your local Consumer Credit Counseling Service. Most of these agencies, which are affiliated with the National Foundation for Consumer Credit, offer low-cost budgeting classes as well as debt repayment plans if you're deeply in hock.

Otherwise, congratulations. The blueprint you just made will help you navigate your way through some potential money minefields, and should speed you on your way to financial independence.