Once you begin earning money, what do you do with it? The short answer to this question is that you should put yourself on a budget. Putting yourself on a budget means prioritizing your needs, and then making and sticking to a spending plan that helps insure that your most pressing needs are met first, before your less pressing needs. Most people do not think about budgeting until they run out of money, which is, of course, too late. People who establish a reasonable budget and stick to it do not tend to run out of money.
Budgeting is about making a plan for how you will spend in the future, not in the past. Nevertheless, it is hard to understand what your needs are without understanding what your past spending habits are. Understanding how you have spent your money in the past will help you decide how to better spend your money in the future.
The key to budgeting is tracking your expenses; writing down a record of every thing you buy and every bill you pay. You cannot manage what you do not track and make yourself aware of. This is the part that scares people. The truth is that many people do not want to know where their money goes because they think that if they think carefully about what they are spending money on that they will have to limit what they spend on things they enjoy. In this sense, many people think of a budget like they do a diet; They think that a budget tells you what you cannot have. This is a misconception. Actually, budgets tell you what you can have. Budgeting is not like counting calories; it more like taking a look at the gas gage in your car. You want to know when you are almost out of gas, right? Well, the same should be true about your finances. If you budget yourself carefully, you will be able to find ways to enjoy yourself and still have enough money to pay the rent on time, and enough gas in your car to drive home.
Okay, now that you understand the importance of tracking your money, how do you go about doing it? Saving receipts is a good start. Don't throw receipts into a shoe box, however. Instead, get yourself organized! You can purchase an expandable, accordion-style file folder and categorize the different sections of that folder based on the types of things you spend money on. You will want to have a section for groceries, rent, insurance, and entertainment, for example. You'll also need a section for miscellaneous expenses that don't fit well in other categories. Some suggested budget categories include:
- HOA Fees
- Homeowner's or Rental Insurance
- Property Taxes
- Home Repairs/Home Maintenance
- Home Improvements
- Natural Gas or Oil
- Telephone/Data Plan
- Cable TV/Internet
- Restaurants/Fast Food
Health and Medica
- Health/Vision/Dental Premiums if not deducted from paycheck
- Prescription and OTC medications
- Fitness (gym, classes, personal trainer, etc.)
- Car loan/lease payment
- Car insurance
- Car repairs/maintenance
- Public and other Transportation (bus, subway, etc.)
- Credit Card Payment
- Student Loan Payment
- Other Loans
- Life Insurance Premiums if not deducted from paycheck
- Computer Expenses
- Subscriptions and Dues
- Other Entertainment
- Pet Food
- Grooming, Boarding, Veterinary
- Household Products
- Other Personal Care
Savings and Investments
- Retirement Accounts if not deducted from paycheck
- Brokerage Accounts
- College Fun
- Savings/Emergency Savings
- Other Miscellaneous
The next step to budgeting is to make a written record of any purchase or payment you make that is larger than a dollar. That's right, a dollar. You can write your record down on a tablet or a loose leaf paper notebook. Do this for a month. Then, you can begin to categorize your expenses.
There are two kinds of expenses: fixed and variable. Fixed expenses stay the same each month. These are things like your mortgage or rent, insurance premiums, electricity and heat, loan payments, etc. Variable expenses, as the name indicates, are changeable from month to month. These are expenses like credit card payments, entertainment expenses (going to movies and eating out), etc. After a month, complete the budgeting worksheet (Appendix A) from the information you have collected, and as part of this process identify your fixed and your variable expenses. You will see how much you spend in each category, and this will allow you to see where your money is going. From here, you can decide how to proceed with budgeting. You can use the budgeting worksheet to keep a running tally of your expenses.
Wants vs. Needs
One of the challenges people face today that keeps them from holding on to their money is the powerful force of "retail therapy." Retail therapy is a name for the "high" that people get when they go shopping and buy things. Gratification from shopping is instant and fulfilling yet fleeting; it doesn't last. Nevertheless, many people are lured into consumerism. Our culture is mired in it. Popular media bombards us regularly with messages that suggest what we should buy-from cleaning products to jewelry to anti-aging creams. "Happiness is only a quick purchase away", these messages tell us. Further, there are very few, if any, competing messages telling us to save and invest. So, it stands to reason that many people buy now and worry later. The problem with this pattern of reckless spending is that people end up spending more than they have and get themselves into debt.
To begin to change this pattern of spending, you need to understand how frivolous spending, even in small amounts, affects your overall financial health. Consider this: frivolous spending is like a leaky faucet. The little drips do not seem to be a problem worth your attention until you place a stopper in the drain one day to measure exactly how much water is leaking out. Then, over the course of a day, those little drips fill your sink and overflow onto the floor! You never knew how much you were losing, because you never paid attention before. A similar process happens with your money if you are a frivolous spender. Small amounts of money spent all the time add up quickly to a large amount of money lost. It is up to you to plug the hole in your wallet and allow those many small amounts to become a large amount of money that you have saved and can control.
You can begin to change your spending behavior by addressing the need-versus-want issue directly. Whenever you make a purchase, ask yourself if you really need the item or if you merely want it. Basic necessities such as food, housing, utilities, & emergency savings easily pass this test - you actually do need them in order to survive. On the other hand, that new iPhone, fancy car or high-end leather bomber jacket are luxuries that you can easily live without. With a little willpower, you can wait to have these things for a time when you can actually afford them without putting your ability to pay for your actual needs in jeopardy