When it comes to credit scores, young adults often lag behind other generations. According to a 2016 NerdWallet survey, the average 21- to 34-year-old has a credit score of just 634. A lower credit score can cost you in more ways than one if it keeps you from getting approved for loans or causes you to pay higher interest rates on what you borrow. The first part of this series on adopting positive credit habits in your 20s can help you organize your financial life. Now, learn how to build your budget and why tracking your spending matters.

Average expenditures per consumer increased 2.3% and average income increased 6.3% between 2015 and 2016. 1

Build Your Budget: Start With Your Fixed Expenses

If a budget seems like a foreign concept to you, here’s the quick lowdown. A budget is simply an estimate of how much you plan to spend versus how much you’ll earn over a set period of time. Having a budget makes it easier to see how much money you have coming in each month, how much is going out and what you’re spending it on.

Tallying up your fixed expenses is a good place to start as you build your budget for the first time.

Fixed expenses are those expenses that are the same from month to month. That may include your rent payment or utilities, cell phone or internet service, car insurance, health insurance or renter’s insurance. You’d also want to include any debt you’re making regular payments on, such as student loans, a car payment or credit cards.

Add in Variable Spending

Variable spending just means everything else you’re paying for each month that doesn’t qualify as a fixed expense. In this category, you might see things like:

  • Groceries
  • Gas/Transportation
  • Dining out
  • Clothing
  • Entertainment
  • Travel
  • Personal care

The amount you’re spending on variable expenses can increase or decrease from month to month. Some variable expenses may be necessities while others are extras. For example, groceries may fall into the “need” category while dinner at your favorite restaurant is a “want.”

Compare Expenses to Income

Once you’ve added up your fixed and variable expenses, subtract the total from your projected income for the month. Ideally, you should have money left over. If you’re ending each month in the red, on the other hand, that’s a sign that your budget may need some tweaking and that you would start to accumulate debt.

Another way to tell if you’re overspending is to look at your credit card balances. If you’re making payments toward your debt each month and your balance seems to stay the same or it’s going up, that can be a red flag that your spending has gotten out of hand, which can have negative consequences.

Using up a sizable chunk of your available credit can negatively affect your credit utilization ratio. Your utilization ratio is the percentage of your total credit line you’re using. A high utilization ratio could lead to a lower credit score.

Track Spending to Plug Budget Leaks

If it seems like you hardly have anything left over at the end of the month or overspending is causing you to rack up credit card debt, then it’s time to find out what your biggest budget drains are. This is where tracking your expenses comes in.

You can track expenses by writing them down daily. Alternatively, you can use a budgeting app that links to your checking account to do the work for you. Either way, it’s important to have a record of what you’re spending.

First, look at your fixed expenses to see if there’s anything you can trim. Cutting back your cell phone or cable TV package could put more money back into your budget. If you have debt, consider whether you could make it less expensive. For example, could you refinance a loan or do a balance transfer to save on interest on higher rate balances?

If your fixed expenses are already as low as they can go, focus your attention on those variable expenses mentioned earlier. Cutting back on some non-essentials can give you more wiggle room in your budget, so you can create an emergency savings fund or pay down debt.

Ultimately, building your budget and tracking your spending are two habits that can pay off down the line and help foster other beneficial financial habits.


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