How to build your first budget

By Liz Pulliam Weston

Angelica Trummell, like millions of other college graduates, is trying to figure out how to make ends meet now that Mom and Dad won't be sending checks every month.

It's not that her parents paid for everything. The art-history major worked for the campus bookstore at the University of California, Riverside, and took out $10,000 in student loans to help pay the bills. She also racked up $2,000 in credit card debt.

But facing life now that she has to foot the entire bill for rent, food, utilities, insurance and debt payments is more than a little daunting.

"A lot of my friends are going back home" because they can't afford post-college life, Trummell said. "I really don't want to do that."

Why you should care about budgets

Putting together a post-college budget is crucial if you don't want to spend your way into serious problems. You're also developing a habit that can serve you well throughout your life.

"You're committing to managing your money instead of letting your money manage you," said economist Kathy McNally, head of financial literacy for the National Foundation for Credit Counseling. "The earlier you start, the better."

You'll probably find it helpful to first track how you're spending money now. Review one of your recent bank statements to get an idea of your current monthly expenses and your monthly take-home pay. Then track every dime you spend for the next three or four days to learn where your discretionary money goes. (For more, see our Managing Your Budget Decision Center.)

OK, now what?

What your budget looks like will depend on many factors, including what area of the country you live in. People in urban areas tend to spend more on housing than their country cousins, for example, while utility costs will be higher in the Northeast and Midwest than in balmy California.

The simplest way to budget may well be "The 60% Solution." The basic idea is that all your "essential" spending -- taxes, food, shelter, clothing and the rest -- comes out of the first 60% of your total, pretax income. The rest, in 10% chunks, is devoted to retirement savings, emergency savings (or debt repayment), short-term savings for irregular expenses (like holidays and car repairs), and fun money.

New college grads, however, may find essential spending chews up more than 60% of that total pay. And if your employer doesn't provide full medical coverage, you'll need to take care of those costs. Trummell, for example, paid about $140 a month for an individual medical insurance policy.

What if the numbers don't add up?

If you've done and redone your budget and you're still spending more than you make, then it's time for some radical rethinking. Here are the most likely culprits:

• Housing: You'll notice this is the single biggest expense you face, so some cuts here can really make a difference. Consider getting another roommate, renting a room from a family member or even moving back with your own dear parents if you can't get this expense in line. Don't worry: it's not forever. Eventually your income will increase and you'll be able to afford better digs.
• Transportation: If you have a car loan, you may have already busted the bank in this category. (Read "The real reason you're broke.") Even an economy car costs about $500 a month, said Springboard President Dianne Wilkman, including payments, insurance, fuel and maintenance. If you bought more car than you can afford, consider selling it and buying something less expensive -- or opting for public transportation.

Continued: Food, utilities, personal spending

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