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We’ve all been there; you’ve made it past the Christmas shopping period and are now patiently waiting for January payday which feels like it’s never going to come. Being in your early 20s is a strange time when we talk about finance. Some of us are at university, working part-time jobs to fund the student union nights out and cover the rest of our rent payments that the maintenance loan was so far off meeting. Others are living in their own places or with family, with council tax and energy bills making us question why exactly we wanted to grow up so fast in the first place. If you’re lucky enough to have savings set aside, keep them there! At times like these, unexpected financial burdens can pop up at any moment so future you will be grateful to have that safety net. And for those of you without savings who can barely rub two pennies together, stop fretting!
Being at this point financially in your 20s is more common than you think. You’re just stepping into the adult world, you’re figuring out what you like, who you are and where you want to be, so it’s justifiable to not have everything settled down and be earning a steady income in the job of your dreams. Your early 20s is a time for hustling, it’s a time to try different roles, take on new challenges and discover new adventures. Life is expensive there is no denying that. But if you know some cheat codes to maximising the adventure lifestyle without breaking the bank, you will come out on top. So, let’s have a look at budgeting tips for when you’re broke, or just want to get in control of what sort of lifestyle you’re really funding.
Learn the Jargon
When I first attempted to approach the subject of budgeting, I admit I was scared off by the language and complexities that the financial world communicates in. And I think to some extent that is the goal of it all; if they make managing your money a confusing and complicated task, people will be less inclined to pay attention to their finances. Therefore, step one in progressing into the world of budgeting for beginners is to learn the key terms and phrases that pop up regularly, so that you have a clue of what exactly you’re signing up for. Here are the main terms you need to know:
NET WORTH: This is the total value of your assets (everything you own) as well as your debts/liabilities (what you owe). If you have more liabilities than assets you will have a negative net worth, or a positive if reversed. Don’t worry if you’re currently in a negative net worth, we will be looking at ways to build a positive net worth shortly!
ASSET: Assets are more than just the money in your bank account. Anything that has value that you own is considered to be an asset and this also includes investments you have. The value of an asset can be categorised into depreciating assets (value will go down overtime, ie. a car) or appreciating assets (value can increase, ie. an original copy).
INCOME: This is the money that you bring in and includes things such as payment from a job or business, property rental or side hustles. Many successful people such as Ali Abdaal talk about having multiple streams of income as the best way to enter a positive net worth.
Gross income is essentially your income before any deductions from taxes and expenses.
Net Income is what you have left following the deductions and what you end up left with.
FORMS OF INTEREST: Interest is a cost charged for either borrowing money or lending money. You will be charged interest by a bank if you take out a loan or have an overdraft with an agreed interest rate. You can earn interest by placing money in a bank account with a specified interest rate. A percentage of the money in the account will be added on as you are technically lending that money to the bank by keeping it in an account with them for a period of time.
Compound interest is the money which you earned as a result of earning interest. I know this sounds a bit complicated but in simple terms, if you have £10 and you earn interest of £1 a month, you will then have £11 the next month. If you then earn interest on that £11 you will earn £1.10 the following month. You’ve earned interest on interest and that’s compound interest.
Simple interest whilst a simpler term is not as favourable. This is a form of interest where you only ever earn interest on the initial money you placed in the savings account. So even if you earned interest on the £10 for a year, you would end up with £22 in total (total interest of £12) as opposed to compound interest, where you would have earned interest on a higher figure each month.
Choose the best bank account for your needs
No matter the state of your finances, the offers and services your bank are providing you will make a difference. If your net worth is in a positive, you ideally need to be choosing a bank account with a decent interest rate, so that you can keep those figures growing. If you’re in debt, there are a number of options for you to consider in order to help you out of this hole. Overdrafts are not an ideal way to borrow money long term, as they typically have high interest rates and no required monthly payments. If you have overdraft debt of over £3k, it is worth looking into a debt consolidation loan as you could save hundreds on interest rates and it can be easier to have one monthly payment than having expenses coming out from multiple places. If you have credit card debt, it can be useful to try out the Snowball Method, which is where you tackle the smallest debt first (regardless of interest). Once this one has been paid off, the next step will seem more reachable. Finally you can contact a number of different agencies to set up a debt repayment plan or even speak to your bank about the possibility of freezing your interest rates to assist in your debt repayment plan.
How do I know which bank account is best for me?
You can use the current account switch facility to assess a wide range of bank account offers and see what services are available from different branches. If you are a student it is worth opening a student bank account (this can be done within 6 months of the start date of your course) as many banks offer interest free overdrafts which you could balance transfer to for a period to reduce interest costs.
How do I create a monthly budget?
If you’re just scraping by each month and patiently waiting for payday, making a budget might seem like a waste of time; any money you get is going on bills or debts and the rest is there to survive with until the next month. However this is where many of us go wrong. It is the people in these situations who need to budget more than anyone.
Here’s how to make a simple monthly budget in easy steps:
Take out a notebook and make a list of every form of income you are going to receive for the month ahead.
Make a second list of every expense you are expecting to come out of your account this month. Make sure to include subscriptions as these are the smaller payments that can often be forgotten about.
Subtract your income for the month ahead from your upcoming expenses. This figure will be called a.
Next, add your net income to figure a. This will be figure b.
Based on figure b, determine how much money you will have left to play with (figure c), and how much you want to save for the next month (figure d).
From figure c, you can then create set amounts to spend on different things such as a weekly food shop, eating out, transport, nights out etc. This is an important step so that when you engage in these activities you know your limits to prevent ending up in a poor financial situation you cannot control.
Presuming that you stick to all your goals and budgets, figure d will become your net income for the following month, where you repeat the process all over again!
Utilise discounts
As a student, I spend my life asking places if they do student discount. Student life is already expensive enough so if you can save an extra quid or two on every purchase this is a super simple way to keep costs low. Make sure to download both the UNiDAYS and Student Beans apps if you’re a student as you can use them both online and in stores/restaurants. If you’re not a student, you can still avail of discounts in a wide range of places and the tool I recommend for online shopping is Honey. It is a browser extension which automatically applies discount codes tried and tested by other shoppers when you click “checkout” on your basket.
Budgeting seems time consuming and complicated, but in the long run it is going to make you feel so much more in control of your life. You will know how much money you actually have to spend on things without feeling guilty for the unknown state of your bank balance.
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