Step 5: Budgeting
Develop Your Living Expense Budget as a Young Professional
Everyone has living expenses, so it is important to know how much money you need to live on. Notice I used the word “need”. This brings us to needs versus wants. Often, we treat all our expenses as needs when many of them are wants. In the most basic sense, our needs include food, adequate clothing, and housing. You may also need transportation to get to and from your job. Another important need to work into your budget is auto, renters/mortgage, and health insurance. Your obligation to pay back debts owed, such as student loans and credit card debt is a need, not a want.
If you participated in our 5th or 8th-grade program called I Am Financial Knowledge, you may remember the 10/10/10/70 principle. This principle says for each dollar you earn or are given, you should save 10%, share 10%, invest 10% and spend 70%. A key part of this formula is “paying yourself first” which means the first 30% of your earnings are paid to you, for your benefit … for your retirement, for emergencies, and for sharing with others. Then, 70% of your earnings are paid to others for products and services such as rent, food, entertainment, and more. This means your living budget should be less than your total paycheck otherwise you will not be able to save.
Savings is important because emergencies happen and we often have life goals that require savings such as purchasing a car or home, starting a family, getting married, helping family, traveling, and more. Before you can invest money in the stock market or other investments, you need to save to have the money to invest.
Other popular tools such as nerdwallet.com recommend a 50/30/20 formula which means 50% of your spending should go to needs, 30% to wants, and 20% to savings and debt repayment.
As a young person who may be paying back student debt, it may be difficult to make your debt payment and put aside 30% of your earnings for saving, investing, and charitable giving. So, for your 5-year life plan, your savings percentage will be set at 10%. In addition to this, there will be an expense set up for student loan payments. Overall, this is more like the nerdwallet.com budgeting tool. Once you pay off your student loan, it would be ideal if you would add the amount you were paying on your student loan to your savings or consider investing it. You do not have to have a goal in mind to save; you can save just to save. This gives you even more freedom in your life.
Of course, if you can, you should always save more than 10% of your income. There will also be other ways to save such as IRAs (Individual Retirement Accounts) that we will introduce later. For now, let’s set up your living expenses budget.
If you have not yet lived on your own it is hard to imagine what it costs to live on your own as you begin your career. Developing the skill to develop a budget can help you tell your money where you want it to go instead of wondering where all of your money went.
To get a general idea of how your future income might support your living expenses, follow Option 1 which uses averages to develop your budget. Option 2 will take you through a more detailed plan where you can fine-tune your budget to your individual needs and wants.
Option 1: Using Estimates to Develop Your Living Expense Budget
To build your budget using estimates we will focus on your largest expenses which are housing, taxes, food, utilities, child care, healthcare, and transportation except for the purchase of a vehicle. For example, for a Tile & Stone Setter making $40,048 per year, a single person with no children, with a liberal food plan, living in a 500 sq.ft. space in Basalt, their major living expenses are:
After these expenses, this person has $5,185 left to spend on other things such as the purchase of a vehicle.
Follow the steps below to use howmuch.net to estimate your living expenses.
Visit www.howmuch.net.
Under the Visualizations tab, select Real Estate.
3. Scroll down the page and look for COST OF LIVING MAPS. Click here.
4. In the search field, type in the name of the town and state you would like to live in and click on Go!
5. Under the household icon, choose Young Workers from the dropdown list or another description that best fits you.
6. Click on “Show more options”. Choose the food plan that best suits you. Next, using the slider, adjust the square feet of the residence you would like to rent.
Thrifty - the USDA Thrifty plan is for people who want to minimize their food expenditures while maintaining proper nutrition.
Low-Cost - for people willing to spend 25-30% more on food than the Thrifty plan. A single male adult would spend $63.70 per week or $9.10 per day.
Moderate -Cost - a person spends 50-60% more than a person on the Thrifys plan. A single male adult would spend $80.30 per week or $11.47 per day.
Liberal - a single male person would spend $95.60 per week or $13.66 per day.
7. From the results, you can see that Basalt is given, not Carbondale. This means the site does not have enough data for Carbondale. But here you can see that a single person wishing to rent a 1568 sq.ft. house or apartment will pay $39,138 per year in rent or $3,261.50 per month. It also gives you estimated food costs, healthcare, and transportation expenses based on what people who live in Basalt are paying.
Utilities
Utilities include utilities, fuels, and public services; household operations; housekeeping supplies; household furnishings and equipment; furniture; floor coverings; major appliances; small appliances; miscellaneous housewares; miscellaneous household equipment.
Transportation
Included are gasoline and motor oil, maintenance, other vehicle expenses, and public transportation. Excluded is the purchase of a vehicle.
Option 2: Develop Your Living Expense Budget In More Detail
To help you estimate your future living expenses, we have developed a template with a list of many common expenses. If there is something you would like to include that is not listed, there are two “Other” fields for you to make additions.
The template is below. On the left are your monthly living expenses and on the right are your annual living expenses. To figure out your annual expenses, fill in your monthly budget first. Your monthly expense will be converted to annual expenses by the spreadsheet.
If you happen to have an expense that’s an annual expense, divide that number by twelve (12) to get the monthly expense and enter the monthly number into the monthly expense budget worksheet.
Estimating Your Monthly Living Expenses
We’ve done a little leg work here at Youthentity to help provide yet another resource for you to help you determine your future living expenses. If you like, you can select from the following options and then fine-tune your expenses for the career you are most interested in by getting real quotes on health insurance, actual properties for rent, and their market prices, etc.
Groceries
In your budget, there are two categories for food: groceries and dining out. In general, dining out costs 300% more than eating the same item at home. Why? In addition to the cost of the food, you are paying the restaurant for the labor to prepare the meal, paying them for the costs needed to operate the restaurant such as rent and insurance, plates and silverware, wait staff, and more, and a small amount goes toward their profit. Dining out is convenient and it can also be a source of entertainment, celebration, and pleasure for a lot of people. However, dining out should be categorized as a want, not a need. Why? You will either go broke or into debt eating all your meals out whether in a nice restaurant, at the local fast-food drive-thru, or at a popular coffee shop. It takes planning to eat most of your meals at home but for most of us, this is a necessity of life. Eating at home also provides benefits such as knowing what goes into your food, where it is sourced, and time with family members preparing and sharing food.
So, how do I figure out how much I need to spend on groceries? The cost can vary a lot depending on what items you buy and where you buy them. The USDA meal plans presented earlier are a good place to start although even the liberal food plan requires careful planning and eating at home most of the time.
Again, in your budget, you will have the opportunity to decide how much per month you would like to spend dining out.
Transportation
Some people just love cars, their design as an art piece, their performance as marvels of automotive engineering, and the creature comforts they offer. Some people view a car as just a way to get from one place to another. Most of us fall somewhere in between. Cars are interesting assets. When we think of an asset, we hope to buy an asset that will appreciate (go up) in value. For most of us mortals who will not be investing in collectible cars, cars are generally a depreciating asset. The value of the car will start decreasing the moment you drive the car off the lot as you add miles to the car. Transportation is an important part of your budget. A reliable car will afford you the freedom you may need to accept certain jobs or to live in a more affordable area. A bus pass will be a lot friendlier to your wallet, but you may not be able to get where you need to go and when you need to for work and your personal life.
We encourage you to research your desired first car including the purchase price, insurance, and the cost of registering the car (i.e., your license plates). In the meantime, here are some guidelines you can use to develop your budget:
Bus Pass - $160 per month
Car 10+ Years Old (gas, insurance, no loan) - $250/month*
Used Car Around 5 Years Old (gas, insurance, loan) - $600/month
New Car (gas, insurance, loan) - $1,000/month
*you must save first to buy the car or have it gifted to you
Housing
We live in a very expensive area. One of the high costs of living in our valley is housing. Three years ago, the median price of a home in Carbondale was over $600,000 compared to $231,000 nationally according to bestplace.net. In the last 12-18 months, housing prices have continued to increase steeply. While there are quite a few apartment buildings (rental properties) that have been built in our area in the last couple of years, the rents are still high.
If you have a property in mind that you’d like to rent and you have the latest rental costs, use that number. Be sure to include renter’s insurance. You will need renter’s insurance to rent the property. Some properties will tell you how much coverage they will require before they let you lease the unit. For example, a popular building in Glenwood Springs requires rental insurance coverage that adds at least $250 per month in addition to the base rent. On top of that, you must pay for pest control, basic internet for the building (whether you use theirs or not), and trash service. If you would like additional storage, an assigned parking spot, or a garage, these are additional costs. So, it is important to understand the total cost of renting the unit, not just the base rent.
Here are some options for you to choose from in developing your budget. These options include homeowner’s or renter’s insurance.
Renting an apartment or house with roommates in Glenwood Springs - $900 per month
Renting a studio or one-bedroom apartment in a newer building in Glenwood Springs- $2,000 per month
Purchasing a $350,500 home in Silt with a 9% down payment and a mortgage loan - $2,000 per month
Purchasing a $650,000 home in Carbondale with a 9% down payment and a mortgage loan - $3,777 per month
Insurance
There are a few types of insurance you will need as a young professional. If you own or lease a car, you will need car insurance. If you rent a home or apartment, you will need renter’s insurance to insure your contents. If you own your home, you will need homeowner’s insurance to insure the building and your contents. Unless you have dependents, that is people who depend on your income to live such as children or another family member you are responsible for, you will not likely need to purchase life insurance as a young professional. Assuming this is the case, this leaves us with the third major insurance need, health insurance.
Health insurance can include services such as doctor visits, dentists, eye doctors, chiropractors, prescription medicine, physical therapy, surgeries, and other forms of wellness care. In general, the cost of health insurance is rising, and it is expected to become only more expensive in the future. Generally, as you get older, your health care needs increase as our bodies age. As a young professional, you may not need to access healthcare as often as your 65-year-old-self. Therefore, young people usually choose a healthcare plan categorized as “catastrophic” coverage. This means you will have a high deductible to meet before your insurance begins to pay part of your expenses. However, your plan may allow annual doctor’s visits for wellness checkups. With this type of coverage, your premium or monthly payment remains low, but should you have a catastrophic event such as an accident requiring hospitalization or you blow your knee out skiing, your insurance will contribute to your expenses once your deductible has been met. This means you should have savings in the amount of your deductible at the beginning of each year plus any money you will need for out-of-pocket expenses according to your insurance plan.
Some employers do offer health care insurance as part of their benefits package, or they offer to pay part of the cost. Others do not. For your budget, we will assume you will purchase healthcare insurance on your own.
To give you an idea of what to budget, below is a sample plan with a premium of $270 per month from Connect for Health Colorado. To look at alternative plans for your budget visit www.planfinder.connectforhealthco.com.
Age: 21
Gender: Female
Tobacco User: no
Location: Garfield County
Zip Code: 81623
Expected Household Income: $50,000 per year
Annual Deductible: $8,550 (This means you are responsible for the first $8,550 of your medical costs each year before your insurance will pay for your expenses.)
Dental and Vision Included? No
Again, this is a fictional example of what health insurance could cost you to help you get started in your budgeting process. It’s a good idea to consult an insurance professional when evaluating insurance choices.
A key point to keep in mind is with this plan, your insurance won’t help pay for your expenses until your deductible has been met. This means you should save some money every month for your out-of-pocket medical expenses or in case you have a medical need that costs thousands of dollars but is still below the plan deductible of $8,550 in this case. In other words, you should have around $8,550 saved each year for medical expenses not covered by your insurance.