Money moves for graduates: How to set up a budget

If you are a recent graduate, congratulations and best wishes for your success!

Whether you were lucky enough to have a job lined up right after completing your degree or not, whether you graduated without student loan debt or your new balance rivals the national average of $30,000, you still need to get your financial life in place. So now that the celebrating is behind you, it's time to get to work. What are your next steps?

Here's a primer to get you started.

Start With a Simple Budget

A budget is a money plan. It's the most important thing you can do with your money. There are a lot of different budgeting methods; but at Get Rich Slowly, we find that it's often easiest to think in broad strokes at first and then work your way down to the specifics, especially if you're a budgeting newbie. We're pretty fond of the Balanced Money Formula (BMF) for this reason, because it's really easy. Here's the basic idea:

Simple, right?

But what if you don't have a job yet? How can you plan a budget if you don't even know how much income you will have coming in? And suppose you're fortunate enough that your parents are letting you crash with them while you get on your feet? How should you be allocating your funds in the meantime?

Good questions! Let's break it down a bit, shall we?

How Much Money Will You Really Make?

Hopefully you graduated with some clarity about the type of job you wanted — and even more, hopefully your major and other scholastic activities, like internships, actually prepared you for that career path. The Bureau of Labor Statistics Occupational Employment Statistics is a great source for figuring out what industry your degree prepared you for, what the entry-level jobs are in that industry, and how much those jobs pay.

Here's some sticker shock for you, though. That BLS figure doesn't accommodate for things like health insurance, social security taxes, federal or state taxes. Here's how to figure out what you're really likely to bring home:

How to Determine Your Proposed Monthly Income


  1. Take the average entry-level annual salary in your proposed field.
  2. Divide by 26, which assumes you get a paycheck every two weeks.
  3. Now take two-thirds of that amount. (That's a ballpark estimate of what your take-home pay could be after all deductions.)
  4. Multiply that by two. (Yes, you'll have some three-paycheck months; but generally speaking, there will be two).

That's it, folks — a fairly reasonable guess at what you can expect to be living off of each month even if you don't have an actual job yet.

An Example of Income

Now that we have a basic idea of what you'll have to work with, let's take another gander at the Balanced Money Formula. This might be easier to visualize with some hard numbers, so let's assume that Graduate Bob is making the average salary for an individual with a bachelor's degree.

According to the National Center for Education Statistics, “In 2013, median earnings for young adults with a bachelor's degree were $48,500.” So using the formula above:

Sample Income Calculation


  1. Average entry-level salary = $48,500 per year
  2. $48,500 / 26 = $1,865.38
  3. $1,865.38 x 0.67 = $1,249.81
  4. $1,249.81 x 2 = $2,499.61

Let's call it $2,500 for easy math. That's what Graduate Bob has to spend on wants, needs, and savings each month.

Extrapolate Amounts for Other Categories and Establish Goals

Armed with an estimate of monthly income, you can then extrapolate amounts for each of the other aspects of the Balanced Money Formula budget. Let's look at how that works.

What Are Needs?

The Balanced Money Formula identified that needs are things you must pay no matter what:

List of Needs


  • Housing
  • Food
  • Utilities
  • Transportation costs
  • Insurance
  • Legal obligations (minimum debt payments — such as a car payment or your minimum student loan payment — are legal obligations)

According to the BMF, 50 percent of monthly net earnings should go toward needs. Under our scenario, that leaves Graduate Bob $1,250 to spend on everything in the needs list above.

Let's assume Graduate Bob spends the high end of one-third of his after-tax income on housing ($825 per month) and owes $30,000 in student loans at a 6.8 percent interest rate.

Millennial man on street with computer

Under the standard (10-year) repayment plan, his student loan payment will be $345 per month. So his rent and student loan payments come to $1,170.

Ruh-roh.

That leaves Bob with $80 per month to spend on everything else listed above. That sounds … how to put this nicely … ambitious? unlikely?

However, knowing this, Bob has some options.

Let's say that he gets some roommates and reads the student loans best practices guide, eventually determining that PAYE is right for him. He reduces these expenses to $500 for rent and $257 for student loans, or $757 total, leaving $493 for all his other needs. That's better, but I sure hope his car is paid off and his car insurance is reasonable. I'm not seeing a lot of wiggle room there.

What Is Savings?

This category is a little more intuitive than needs, but still there are different forms of savings:

Types of Savings


  • Emergency fund
  • Retirement savings
  • Debt payments (beyond the minimum legal obligations)
  • Short-term savings goals

Graduate Bob has $500 per month to allocate toward savings. Saving for six months' worth of needs would mean Bob should shoot for an emergency fund of $7,500. If he wants to save that amount in a year, he needs to save $625 per month, which is likely out of reach for Bob. A more modest three-month emergency fund of $3,750 is attainable in a year if he saves $312.50 a month in a high-yield savings account.

He should also start saving for retirement, considering that funds contributed in one's 20s have the greatest impact due to the extraordinary power of compound interest. If he's got a job that offers retirement matching, he should contribute up to the match. If not, maxing out a Roth IRA means setting aside $450 per month or so.

Knocking out those student loans is not only a good use of savings, but also paying off that debt will free up a huge portion of spending in his needs category. And of course, if Bob has credit card debt, he needs to pay that off too.

Fortunately, getting paid every two weeks means there will be two months during the year when Bob will get three paychecks (an extra $5,000 during the year). If he isn't running a deficit during his normal, two-paycheck months, he can throw that amount toward savings and make some big progress. How would you prioritize?

What Are Wants?

Anything that isn't a need or savings is a want. This includes things like:

List of Wants


  • Entertainment (cable, movies, concerts)
  • Food beyond the basics (think dining out, organic foods)
  • Hobbies

Sometimes, the balanced money formula can get out of balance. However, by allocating needs and wants first, you can ensure you're not spending too much on wants. Graduate Bob has $750 per month to allocate toward wants if he can manage to keep his needs within 50 percent of his budget. If his needs exceed that, the excess should be paid for out of his wants category — he shouldn't sacrifice savings if at all possible.

Tailor Your Strategy to Your Circumstances

Of course, everyone's exact situation will vary. Some people live with their parents and can save more or pay down debt faster. Others won't be able to find full-time employment in their field right away and will have less income. The area of the country in which you live has a huge impact on the availability of jobs, wages, and cost of living too. And of course you should consider more than salary when evaluating a job offer.

However, doing some basic research in advance will help you create a spending plan that's aligned with what you are actually likely to earn. Then you can make adjustments as needed.

What money moves would you recommend for new graduates? Share in the comments below!

More about...Budgeting

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getagrip
getagrip
5 years ago

As a note the author should state what the 0.67 multiplier in the sample income calculation is for, I assume it was meant for taxes. Otherwise, I feel the best thing is to have some roommates you can count on. Two of my kids have moved into cities which I consider high cost of living and neither earns anywhere near that national average of $46K at entry salaries of about $30K and they are living and saving a bit and that is coming mostly from sharing arrangements with roommates. Housing and utilities eat the lion’s share of expenses and stunningly,… Read more »

Sanjeev
Sanjeev
5 years ago

Good Article Honey !!! But I have to say that “Budgeting” has never worked for me. If it works for others, I suggest, please do so. But for me, it is hard to keep track expenditures and always be in budget. I go with what David Bach says in his “Automatic Millioniar” book. And that is automatically pay yourself FIRST. I think for recent graduate, pay yourself 20% of your income FIRST automatically to emergency fund, paying debt, saving and investing. Live on 80% of the income. No headache of “Budgeting”, if you don’t like it. Living on 80% will… Read more »

Honey Smith
Honey Smith
5 years ago
Reply to  Sanjeev

This sounds like just another way of thinking about budgeting, and I can see why it would appeal to those with negative associations surrounding the word “budget.” Whatever works for you! I personally love spreadsheets, haha, I’m a nerd 😉

Ely
Ely
5 years ago

$48k is entry level??? I’m 41, have been in my industry for close to 15 years, have 3 college degrees, and would still need CPA certification in order to make that much.

Must be those computer science folks like my BIL – whose entry level pay was north of $80k – throwing off the numbers.

Honey Smith
Honey Smith
5 years ago
Reply to  Ely

Yes, that is (I imagine) an average across industries and locations. YMMV!

cc
cc
4 years ago
Reply to  Honey Smith

Hello Honey,

First of all, your articles are my favorite articles on GRS.

However, I think in this case you’ve misrepresented the average starting salary for college graduates. The data you site in this article actually represents the average salary for workers ages 25-34 with bachelor degree. Which is a big demographic that isn’t made up entirely of starting salaries, but also of established professionals. It also leaves out all the 21-24 year olds that graduate college and enter the workforce with starting salaries.

Best,
CC

KT
KT
5 years ago

What about retirement savings? I’m a big Dave Ramsey listener and he always talks about that 15%. But that 15%, especially if you do ROTH, comes out after tax but the amount is if it were pretax – so rather than take the tax break, you’re putting in more (and it grows more, i get it). But then, since I commute to NYC, a big chunk of my check goes to commuting – $300 a month, $130 of that is pre-tax. So should I subtract that $300/month ($3600 year) and put in less to my ROTH (i.e. Salary-3600 * .15)… Read more »

3rd Generation
3rd Generation
5 years ago

“If you are a recent graduate, congratulations and best wishes for your success!”

Especially if you ‘graduated’ from ‘college’ and cannot make a simple budget for yourself.

Shameful and insulting.

Really.

Beth
Beth
5 years ago
Reply to  3rd Generation

Sadly, a college education doesn’t necessarily mean a person has a personal finance education. There are plenty of ways for people to learn how to manage their money, but no school I know of has a personal finance course as a degree requirement.

Jen from Boston
Jen from Boston
5 years ago
Reply to  Beth

Similarly, a recent grad may not know all of the expenses for living on your own.

Jen from Boston
Jen from Boston
5 years ago

I’ll another bit of advice: Avoid buying lots of furniture! I made the mistake of buying a full living room set. I love it, and it’s very comfortable, but I really didn’t need it. And it ended up costing me more because I had to rent apartments that could hold all my furniture.

Joyce H
Joyce H
5 years ago

No mention is made about GIVING….

Jane
Jane
5 years ago

This is all solid information. But why wait until you graduate from high school or college to learn this? I have been teaching this to my children since they entered elementary school. As they get older, I tailor the information for what is coming in their future. My 17 year old has all this information already. If good habits are learned EARLY they will have them for a lifetime.

Marshall
Marshall
5 years ago
Reply to  Jane

Great point! Learning how to manage finances before college is a huge advantage, especially if you’re paying for college yourself.

Kristi @ Femme Frugality
Kristi @ Femme Frugality
5 years ago

I have recently started trying to be better about actually budgeting in spreadsheets etc. but it’s difficult to set hard numbers when my pay fluctuates every month and my husband’s paycheck is heavily reliant on overtime pay. Good tips though, especially for someone just starting out with a “real income” for the first time.

mysticaltyger
mysticaltyger
5 years ago

A 20% savings rate is good, but if you want to retire before age 65, there’s a good chance it won’t get it done because: –Some of that savings goes into your savings account for a down payment on a house, home repairs, replacement car, etc. –That means you’re saving less than 20% for retirement. Unless you’re getting a great 401k match, you have to keep up at least a 15% savings rate for 40 years if you want to retire on time in your 60s. Problem is, a lot of people lose good paying employment before their 60s. And… Read more »

Jenna L at Hello Suckers
Jenna L at Hello Suckers
5 years ago

Great resources!
As many before me have mentioned, these kind of articles aren’t patronising because there are plenty of graduates who may have lived at home/in shared housing to save money, many who wouldn’t think of savings and investments as they move into the workplace…

Advice is always helpful in the world of finance, it’s up to you if you find it useful or you agree with it.

Michael
Michael
5 years ago

This seems like a great long-term target, but I don’t think that keeping needs to 50% is realistic for most new graduates. I would say if you can get accommodation to 50% (rent/mortgage plus utilities) you are doing well – food and transport have to come out of the other 50%.

Kelli B
Kelli B
5 years ago

Thanks for sharing. While one would hope that a college grad could make a budget and understand their income versus their bills, I’m not convinced that is always the case. I’ve met grads who can make a budget to pay their bills but forget other items like an emergency fund and retirement savings.

Jim
Jim
2 years ago

$48k is entry level??? I’m 35, have been in my industry for close to 5 years, have 2 college degrees, and would still need CPA certification in order to make that much.

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