Many young adults feel like they can’t save any money without sacrificing everything. You feel like you have to choose between comfort, fun or financial security all while struggling to adjust to your new life post grad.
I’m here to tell you that this is not true at all. There is a way to find a budget that allows you to save, invest, and enjoy life all at the same time. You can build wealth, even on an entry-level salary, but you have to be intentional about your money and where its going.
1. Mindset Shift: Budgeting Is About Freedom, Not Restriction
The biggest fear that most people have when they hear the word budget is feeling deprived. In most cases, these people are used to living paycheck to paycheck and feel as though there’s no room to save anything.
Here’s the hard truth about most people living a paycheck-to-paycheck life – they are living above their means to begin with.
The truth is a budget will help you prioritize what is essential in your life. It will help you cut out any unnecessary spending while still allowing you to spend on things you enjoy.
2. Understanding Your Take-Home Pay
Take home pay is something that confuses a lot of people when starting their first job. Unfortunately, the number we are given for our yearly salary is not what actually hits our bank accounts on payday. Tax, 401k, and health insurance deductions lower your biweekly paychecks.
Let’s break down how to actually figure out your take home pay:
A. Why Your Salary Isn’t What Hits Your Bank Account
Let’s say your starting salary is $50,000. This is your pre-tax income. The deductions you will typically see coming out of your paycheck are as follows:
- Federal Income Tax – This depends on your tax bracket and filing status. The higher your salary, the higher the percentage you’ll owe.
- State Income Tax – Some states don’t have state income tax, but others do. You can find out how much your state deducts from your income on the official IRS website.
- FICA Taxes (Social Security & Medicare) – These are automatically taken out of your paycheck.
- 401(k) or Retirement Contributions – If you contribute to your employer’s 401k plan, this will be deducted from each paycheck. The positive to this is that it is pre-tax money being deducted, so it lowers your taxable income. I personally recommend contributing at least the minimum that your company will match to start out.
- Health Insurance Premiums – If you are enrolled in your company’s health benefits, your share of the premium comes out of your paycheck.
B. Estimate Your Actual Take-Home Pay
Instead of doing the math yourself, I highly recommend using an online paycheck calculator. There are many of these online, I like the ADP calculator.
Another very simple method you can use is waiting until you get a few paychecks in your bank account to see how much your monthly income is. This will vary depending on your company’s pay cycle.
My first job paid us out twice a month, so our paychecks were different each payday. Some companies pay their employees bi-weekly, so their paychecks are the same every payday.
C. Why Knowing This Number Matters for Budgeting
If you don’t know your real take-home pay, you might:
- Overestimate how much you can afford in rent, car payments, and other expenses.
- Struggle to save because you don’t account for deductions.
- Live paycheck to paycheck because you’re budgeting based on your salary, not your actual cash flow
Before setting up a budget, check your latest paycheck or use a calculator to find out exactly how much you bring home each month. That’s the number you should build your budget around!
3. Creating a Budget That Works for You
There is no one size fits all when it comes to a budget. Everyone organizes themselves in different ways and everyone spends money in different ways. The important thing to consider is what budget will you actually be able to stick to and be disciplined with.
A. Pick a Budgeting Method That Fits Your Personality
Here are some examples of common budget methods:
50/30/20 Rule:
This is a simple budget that most personal finance experts will tell you is a good starting point. This just means you’ll allocate your paycheck as follows: 50% needs, 30% wants, 20% savings/investing.
Zero-Based Budgeting:
This just means that every dollar in your paycheck has a job. This is best for people who like control over their money. Let’s say your take home pay is $3000 a month. We can allocate a dollar amount to each expense (ie. $1200 rent, $500 savings, $400 groceries/food, $200 student loans, $400 car expenses, $300 entertainment/fun).
I preferred this method when I got my first job because my main goal was to build my emergency fund. It was easier for me to set a goal of $10,000 by the end of the year, which broke down to $833 per month. This was something I was able to fit in my budget at the time and didn’t make me feel too restricted.
Pay-Yourself-First Approach:
This method prioritizes savings and investing before anything else. It just means that you are taking the money you wish to save and invest out of your paycheck before it even hits your bank account. This is best for people who have high savings goals or are maybe little further along in their career to where they can make this a top priority.
The best way to go about this is to set your 401k contributions as high as you are able to go. This will automatically come out of your paycheck, so you won’t even be able to touch it. Then once you’ve contributed to your 401k, you can set your direct deposit to deposit a portion of your paycheck directly to your savings account. This way you won’t be tempted to spend it.
I use this method now that I am a few years into my career and am more established with my money than I was when I first started out.
Cash Flow Budgeting:
This budget method is more flexible for people with irregular expenses and income. This is better for contract workers, freelancers, bartenders, or any job where you might earn different income depending on the month or season.
Set aside money in a short-term savings account. This is a savings account where you can access your money easily. Banks almost always offer savings account options along with your checking account where you can easily move money from one account to the other. With this method, you would save a bigger chunk of your money during your high-income months to then cover any expenses during your low-income months.
B. Fixed vs. Variable Expenses
Understanding your fixed vs. variable costs will help you get a better idea of where you can cut back on spending.
- Fixed costs are things like: Rent, utilities, insurance, loan payments.
- Variable costs are things like: groceries, dining out, shopping, entertainment, etc.
While it’s almost impossible to completely cut out your variable costs, there are always little things you can do to cut back. Look for little things you can do every day to lower those variable costs.
My friends and I like to find free or low cost hang out activities like picnics, walks, tennis, or potluck dinner parties. You’ll be surprised how much you can save in a month and still have fun by being intentional with your plans.
C. The “Guilt-Free Spending” Fund
Set up a small fund that you can dip into when something comes up that you really want. Set up a short-term savings account through your bank and set aside a small amount of money into this every month. It can be as little as $100 a month that you contribute to it. That way when a friend spontaneously suggests a vacation, you’ll already have some money set aside to book a plane ticket or hotels and not feel anxious about where you’ll get the money to go on the trip.
4. The Big Three Expenses: Where to Save the Most
A. Housing
Housing in today’s day and age is probably the hardest thing to save on. The cost of living almost everywhere has gone up tremendously. This is likely going to be a big chunk of your paycheck, but there are always ways to save on it.
As much as it sucks to have roommates sometimes, living with multiple people and splitting rent is the number one way to save on rent and utilities. It also might stink to not be able to live in the nicest neighborhood in the most luxury apartment, but the reality is it’s necessary to live in as cheap of a place as you can mentally handle for the first few years while setting yourself up for success.
Also, it you have the luxury of being able to live with your parents, DO IT! Even just for a year. Your older self will thank you in a few years.
B. Transportation
Car payments and insurance are two huge expenses. If you can, avoid car payments if you can. Not everyone has the luxury to be able to do this, but if you live in even a remotely walkable area, try to avoid having a car.
If you absolutely must have a car, try to find a cheaper used car that you can use for the first few years at least. It can be really tempting to get an expensive new car now that you’re making money, but the cost adds up really fast, and your budget will be pretty tight every month.
C. Food & Alcohol
Spending on food and alcohol is one of the easiest ways to overspend when you’re young. It can be very tempting in your twenties to go out every weekend with friends to dinner, happy hour, late night drinks, etc.
Try doing things like meal prepping to avoid the temptation to get takeout every night. Also maybe suggest to friends to have drinks at someone’s apartment before going out for the night to avoid spending as much on drinks at the bar.
5. Side Income: A Game Changer for Entry-Level Salaries
Everyone on the internet nowadays likes to talk about side hustles, but those people always over complicate it and make it sound like you need to learn new skills and work super hard. The reality is, there are super easy ways to make extra income on the side. Some examples of this are: freelancing, tutoring, dog sitting, uber driving, doordash/uber eats, etc.
I like to dog sit to make extra money. I’ve had months where I’ve made an extra $500 just from dog sitting for two weekends. I like to use the Rover app. I’ve heard stories of people earning over $2000 a month from this.
Make sure you don’t overextend yourself. It can be tempting to take on a bunch of side jobs, but sometimes it can feel like you are working 24/7 with this. Find something that you can do that allows you to earn some extra cash but also gives you time to relax.
6. Avoiding Peer Pressure
It can be really tempting to overspend when your friends suggest plans to go out and spend a lot of money. FOMO can be one of the hardest things to overcome when you’re young and trying to set yourself up for success. Here are some things you can do to combat this:
- Learn to say no without feeling awkward: Be honest with your friends about why you’re choosing to not spend money. The more you do this, the more comfortable you’ll feel doing it.
- Set boundaries: Your real friends will understand and not push your boundaries. It might also be time to re-evaluate certain friendships and what they mean to you.
- Finding free things to do (that are still fun): Find activities that you like to do that are also free or relatively inexpensive. This can be a fun way to pick up a new hobby as well.
True friends won’t pressure you to spend more than you’re comfortable spending. If anyone tries to make you feel bad or gets mad at your for trying to prioritize your finances, then they are not your real friend!!
Conclusion: You Can Live Well & Build Wealth at the Same Time
Budgeting is about spending smarter, not depriving yourself. Even on an entry-level salary, you can save, invest, and enjoy life with the right plan.
Start small by picking a plan and following it for just two weeks! You’ll see how easy it is to adjust and track what you are spending, and it won’t seem so bad.
With small, intentional steps, financial success is within reach!