The summer months can often be a time when young people start working for the first time. Whether it’s your first summer job or you have just graduated college and are transitioning into the working world, it is essential to create good financial habits from the moment the first pay cheque hits your bank account. As thrilling as it is to finally have some financial independence, it is essential to learn how to manage your money so you can make it last.
I was lucky that when I first started working, I was instructed to always save some money for a rainy day and in the current cost of living crisis, this saying has never been so important. I have to admit, as I am paid monthly, I still find it hard to budget and manage my finances, but understanding your payslip and starting a basic monthly budget is a great place to start.
What is a budget?
A budget is essentially an estimate of income and expenditure for a set period of time. It is a way of keeping track of the money you are getting into your account and the money you are spending. A budget should make it easier to plan for expenses before they happen, rather than hoping you have enough money to cover emergencies or essential costs that occur.
The importance of budgeting
Monthly budgets are popular because many recurring expenses, like rent, utilities, credit card payments and other loan payments occur on a monthly basis. Ideally, a budget will show you’re spending less than you make each month, leaving you with money you can save.
Even if that isn’t the case, it still provides a good opportunity to assess your spending habits.
Firstly, you need to know and understand what is coming into your account so you can assess how much you have to spend. This:
50/30/20 budget rule
The rule states that you should spend up to 50% of your after-tax income on needs and obligations.
The remaining half should be split up between 20% to savings and debt repayment and 30% towards things you want (discretionary items).
Example of 50/30/20 rule
If someone has a monthly after-tax income (net income) of €2,500 the basis for allocating their budget would be the following:
Five tips on budgeting from a financial expert
Colm Davis, a financial expert and owner of Davis Financial Services, gives his top five tips on budgeting.
1 First priority – Set up an emergency fund; preferably with up to one month’s worth of salary. From there build up a more structured medium- to long-term savings strategy.
2 Understand the importance of saving – Saving gives you the freedom to choose what you want to do with your life, gives you focus and makes you prioritise.
3 Set realistic goals and write them down – What is it you want to achieve? Be realistic in setting your goals and remember everyone is different.
4 Discipline – This is the difference between success and failure. Once you have set your goals and made your plan it is important to stay the course. But if you have been realistic in your objectives, you will achieve your goals.
5 Review – Review your circumstances and goals at least once a year. This will help you track your progress, and give you a chance to either refocus or alter your goals to your changing needs.
Five Steps to creating your budget
1 Calculate your monthly income: Determine how much money you make each month. This will set the limit for how much you can spend (and save) out of each pay cheque. Make sure you calculate your income using your net income, also known as your “take-home pay”.
2 Track your spending: To get a sense of how much you should budget for each month, it’s a good idea to track the amount you’re actually spending over the course of a few months (as there will always be a variation).
3 Identify your financial priorities: After tracking your spending, it’s time to sit down and look at your spending history and how it aligns with your financial priorities.
4 Design your budget: To design a budget, list out different line items that correspond to each spending category. One of the first things you should put in your budget is savings.
5 Review your budget and make changes if required: Budgets are a living document, they can be changed and adapted according to your lifestyle.
If you are on a payroll, the main income you will receive is from an employer through your weekly, biweekly or monthly payslip. But what does your payslip mean?
Your payslip is a written statement from your employer that outlines your gross pay and certain deductions – pay as you earn (PAYE), universal social charge (USC), and pay-related social insurance (PRSI). Depending on your personal circumstances, it may also list other items such as pension and other deductions.
Each payslip includes general information such as your Personal Public Service (PPS) number, your employer (company name), the pay period (the week(s) or month your payslip relates to), and your pay date. After that, your payslip is divided into different sections:
Gross income: Your gross income is the total amount of money you make before any deductions are made. This includes every source of income you may have.
Net income: Net income is the actual amount received by you from your wages.
Taxable income: Taxable income is the amount of your income you pay taxes on. This is different from gross income as certain allowable deductions are taken from your gross wages before income tax is calculated.
PAYE: Pay as you earn (PAYE) is when your employer is required by law to deduct your taxes directly from your gross wages. They then send this off to the Revenue Commissioners on your behalf.
PRSI: Pay related social insurance is a contribution to the social insurance fund, which pays for social welfare benefits and pensions. This is automatically taken from your wages if you’re a PAYE worker making more than €38 a week.
USC: The universal social charge is a tax payable on your total income. Depending on your circumstances, you pay USC at the standard rate or the reduced rate.