The College Graduate Budget: Designing a Budget that Works

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You’ve just graduated college, and you’ve got your first real job lined up. But after a paycheck or two, suddenly, you realize that you don’t have a clue how to manage your finances. Here’s the good news:  you are not alone. When I graduated college, my finances were a disaster (more on that in a minute). After learning how to manage my finances, I realized that school didn’t prepare me to handle money, and I’d be willing to bet it didn’t prepare you, either. Today, I’m showing you how to design your college graduate budget. Using these principles, you’ll be on a proven path to better finances. Let’s get started!

My Post-College Financial Journey

When I graduated from college, I was fortunate to have accepted a relatively high-paying job in financial services.

The trouble was, even though I was making a nice salary, I seemed to face a shortfall still each month. Having exceptionally generous parents, they generally helped cover my monthly shortfall. However, every month I found myself asking them for money.

After a while, I realized it was all a bit ridiculous. I was making more than most right out of college, yet I couldn’t figure out why I never had enough money. It wasn’t until a good buddy mentioned that he had had the same issue that I realized it wasn’t just me. However, my buddy had found a solution. He started budgeting.

While I resisted for a while, he kept insisting that a budgeting app called YNAB had changed his spending habits. He was now able to live within his means without giving anything up.

So, long story short, I caved. I downloaded this mysterious app and started setting up my budget. For the next month or two, there was a lot of kicking and screaming. And I mean A LOT. I’ve never felt so broke.

But my friend told me that it would start to work if I stuck with it. Sure enough, within a few months, I had a plan for my spending. Every dollar had a purpose, and I knew exactly where my money was going. 

That first year I used YNAB, I would guess I slashed my spending by somewhere between $6,000 – $10,000. No more budget shortfalls. No more asking mom and dad for money. It worked.

In the years since my budgeting breakthrough, I realized there are countless other recent college graduates facing spending and budgeting woes. In fact, that’s why I started After School Finance. I wanted to tackle exactly that. 

Today, in furtherance of that mission, I want to help you get your post-graduate finances under control. When you graduate school, you have a clean slate to design your lifestyle and spending. That’s why now is the best time you’ll ever have to develop your budget. 

How to Build Your College Graduate Budget

How do most college graduates budget? The truth is, they don’t. But budgeting is the key to understanding your spending and managing your money.

As we work to build out your budget today, I will lay out some guidelines about what you should be spending and saving. While this may vary significantly from your current spending, this guide can help you identify areas where your budget may be out of whack.

Knowing what you should be spending, you can figure out how to redesign your lifestyle to bring your finances into balance. While this may not be easy, doing this when you’re just out of college is the best opportunity you’ll ever have. Because once you get accustomed to a lifestyle of overspending, it’s hard to turn back.  

With all that said, let’s get started designing your budget. 

Figure Out Your Income

When you start creating your college graduate budget, the very first thing you need to do is figure out how much you’re bringing home after the government takes their cut.

Your take-home pay is the starting point for your budget. Once you know this amount, it’s time to balance the budget – matching your spending and saving to your income. 

Take 20% off the Top

Once you have your take-home pay, it’s time to start subtracting your spending and saving. As a first step, take 20% out immediately for saving and retirement goals.

This sounds like a lot. I get it. But if you don’t start saving for these things now, you won’t later.

Trust me. I was the first person to make the “I don’t make enough to save 20%” excuse. Unfortunately, this just isn’t true – your mindset on this point will be roughly equivalent to your results.

These 20 % savings should ideally be going into a tax-advantaged retirement vehicle such as a 401(k) or IRA. These accounts will help you keep more cash in your pocket and out of the government’s hands.

Of course, if you want to use this 20% to start building an emergency fund, that makes sense too. 

While there are countless ways to optimize this 20% (for different goals, using certain account types, etc.), the most important thing is to get in the habit of setting it aside. Once you get used to putting 20% of your income towards your goals, you can refine your approach.

Housing & Utilities

If you’ve set aside 20% of your earnings towards your savings goals, you are free to spend whatever is leftover. Honestly, spend it as you wish and don’t fear because you’ll know you’re on track for retirement and savings goals. 

However, it wouldn’t be that useful if this guide stopped there because it’s all the other spending where things get tricky. In laying out the rest of your budget, let’s start with your most significant expense:  housing and utilities.

While there are no hard and fast rules, I would generally suggest keeping your housing expenses to around 30% of your budget. So, if you’re bringing home $4,000 per month, aim to spend about $1,200 per month on housing. I realize this isn’t much in many cities, but this is a reality check. Before you sign up for that $2,000/month apartment, acknowledge that this decision has the potential to cause a lot of financial stress and set you behind on your goals.

Of course, there are other needs to go along with your housing, like electric, gas, water, cable, and internet bills. Unfortunately, utility bills are a bit out of your control. However, you can manage your cable/internet expense down if it’s taking up too much room in your budget. 

In fact, I’ve used a service called Truebill to negotiate down my cable and internet bill. They’ve saved me hundreds, and I haven’t even had to change my service!

Debt

Next, if you’re graduating college with debt, you’re amongst the majority. According to Student Loan Hero, 69% of college students took out student loans.

As you’re building up your budget, factor in your student loan payments. These are non-negotiable costs, so you must make room for them in your budget.  

That said, assuming you have a relatively low interest rate on your loans (in the 4-5% range), I recommend you only make the minimum payments. Why? Because you can do better by investing the difference in low-cost index funds, which have historically earned a return of 7-8%.

However, if you want to pay off your student loans faster, check out this ASF guide on paying off your student loans in five years or less. 

Of course, if you have other high-interest-rate debt like credit cards, build into your budget a plan to pay that down as fast as possible (and prioritize these payments even before the 20% savings goal mentioned above). 

Transportation

After housing and debt service, one of your most significant expenses is likely transportation. 

Here’s the best advice I can give you on this topic.

Do not buy a new car when you graduate. If you must purchase a car, buy used. 

I’m going to let you in on a bit of a secret. Ever since I was 16, I wanted a white BMW 3 Series. Don’t ask me why, but I love that car. Around graduation time, my old car was starting to have some issues, and it was time to look for a replacement. Knowing full well that I couldn’t afford a new car, I started researching used BMW 3 Series vehicles. Long story short, I found the perfect three-year-old vehicle for around $25,000. In the four years since owning that car, the value has dropped to approximately $14,500. So over four years, I’ve paid roughly $2,500 per year for that car. 

How does that stack up to new car ownership? According to AAA, the average cost of new vehicle ownership is $9,282. This number includes insurance, gas, etc. However, my point is that I’ve been driving around a near-pristine BMW for about one-third the cost of the average new car (after factoring in insurance, maintenance, etc.).

It’s not about being cheap – it’s about being smart with your money. Buy used.  

Of course, in addition to buying a used car, your best bet is to pay for a car in cash. Paying for a car in cash can be pretty challenging right after graduating, so there’s no shame in driving around a junky vehicle for a few years. 

While there are no hard and fast rules, I’d suggest trying to keep your spending on a car to about 20% of your income.

You’ll also need to factor gas, insurance, etc. into your budget – and these are expenses that aren’t easily controlled.

Insurance

Next on this budget-building tour, start to carve out your insurance expense. While there are many kinds of insurance, the critical ones that you should carry include:

• Homeowner’s or Renter’s Insurance
  • Renter’s insurance is usually a couple of hundred bucks per year
  • Homeowner’s insurance is 2 – 3x that amount (though this can vary significantly based on the value of the house)
• Health Insurance
  • Expect to spend a couple of hundred dollars per month
• Car Insurance
  • Expect to spend around between $1,500 – $2,000 per year as a recent graduate
• Disability Insurance
  • Expect to pay around 1% of your salary

While insurance expense is hard to control, the number one thing you can do is shop around regularly. Shopping for your insurance helps keep your insurance carrier honest and ensures you pay the best possible rates. 

Phone Bill

Next, most college graduates have a cell phone bill. Certain carriers like T-Mobile tend to be quite a bit less expensive, so this one is worth shopping around. 

Cell phone coverage can cost up to $100 per month for one person, but as I said, there are cheaper options.

It may also be worth building the cost of replacing your cell phone into your budget, as this happens every 2-3 years for most people.  

Food

Food is a relatively large line item in most people’s budgets. In terms of your grocery budget, it’s pretty reasonable to expect to spend $300 – $400 per month for one person (though obviously, this can be a lot more or less depending on how you eat).

Similarly, you’ll want to build into your budget restaurant spending. Your restaurant budget is up to you as long as the rest of your budget adds up. 

Entertainment

Finally, build some entertainment expenses into your budget. Entertainment expenses can be anything from books to travel to clothing.

Budgets are personal, and your spending in these categories will be, too.

Make Your Budget Dynamic

While I’ve covered many of the key categories, there are many other items you may wish to include in your budget. In this list of budget categories, you’ll find other budget items to consider.

Once you’ve got your budget set up, remember that it’s not going to be perfect. A budget that works is a budget that changes over time to align with your spending priorities.

As you get used to using your budget, you can increase or decrease your budget in each category, aiming each month to balance the budget in a way that works for your lifestyle. 

Finally, once you’ve got the basics of budgeting down, learn some more advanced budgeting strategies.

For example, sinking funds are one of the best ways to plan for longer-term expenses. For example, if you think you’ll spend $1,000 on holiday shopping, you can use sinking funds to set aside $83 per month. By the time the holidays roll around, you’ll have the money you need to cover this infrequent expense. 

Designing the College Graduate Budget:  A Summary

If you’ve been wondering how to manage your money after college, the number one thing you should do is build a budget to align your spending/saving to your income. Using the general guidelines outlined in this article, you’ll be well-positioned to have a stable financial future.

To recap, here are a few items to consider in setting up your budget.

• Your Income less
  • 20% for retirement/saving goals
  • Debt service
    • Make at least the minimum student loan payment
    • Pay off high-interest-rate debt (such as credit cards)
  • Housing & utilities
    • Aim for 30% of your income to be used towards housing
    • Use a service like Truebill to lower your internet and cable expense
  • Transportation
    • Aim to keep this to around 20% of your income
  • Insurance
    • Get adequately insured to protect your home, car, health, and income
    • Shop insurance regularly to keep costs under control
  • Phone bill
    • Shop different carriers to minimize your expense 
  • Food
    • Adjust this number based on how you eat and the money leftover in your budget
  • Entertainment
    • Spend as you wish so long as you’ve covered your retirement/saving goals and all your other essential budget categories

Budgeting doesn’t have to be complicated. But designing your college graduate budget is the number one thing you can do to prepare for long-term financial success. 

So, start building your budget with an app like YNAB or Tiller Money and watch the financial wins start rolling in!