Monday, June 6, 2011, AM | 1 Comment
Creating a budget is important for everyone whether old or young. Following a budget consistently is as important as creating one. You don’t have to be an MBA or some kind of financial guru to create and follow a budget. As long as you can track your income and expenses along some lines that you may have established for yourself to live on, you should do okay. Budget is a part of your overall money management. If you want to manage your money, you gotta have a budget.
It doesn’t matter whether you just have a few bills to pay every month, or you are responsible for all your household expenses, you must realize how much money you have and where your money is spent. That is the first step toward achieving financial independence. Make your budget as the foundation for good financial habits. It will help you avoid any problems and pitfalls that usually arise without a structured plan.
Essential components of a budget
We all know a budget, at a minimum, has two components to it: Income and expenses. Almost every young person has only one income source and that is a weekly paycheck. So you know what your income is. Now keep track of where your money is spent. It shouldn’t be too hard even though you may find out some unnecessary spending. When you get your monthly bank statement, take some time out of your everyday life and examine – I mean really examine – your income and expenses.
The idea is to take a snapshot of your monthly expenses, your savings and take-home pay. There are certain expenses that are recurring like rent, utilities (may change from month to month but not much), and cable. Also what you spend on discretionary items such as food, clothing and entertainment.
Save before you spend
Generally speaking, you always save when you save before you spend. You seldom save when you spend before you save. Some folks call it pay yourself first. When you are creating a budget, before you spend, do yourself a favor, talk to your Human Resources Rep and have them deposit a certain percentage of your take-home pay to your saving account. The rest of the money you get as your paycheck. You might have difficulty adjusting to the direct deposit, but after a month or two, your remaining check is your income. Get used to it. After a couple of more months, you would not even remember it but your saving account will continually be bulging with all that cash.
Most young folks have expenses similar to the items below:
- Apartment rent. I assume you are just starting in your career and you are not yet able to buy a home.
- Car loan. I assume you bought a car the same month you started working. You are entitled to buy your car. Try to buy 3-to-4 year old so you can easily keep it for long time.
- Utilities: Phone, Electric, Water, Gas, Cable, Internet.
- Insurance: Car, Health, Life, Home.
- Discretionary expenses: Food, Gas, Clothing.
- Impress your girlfriend: That’s a big and bold NO NO. Let them pay their share of the bill.
Let Reality dawn on your finances
Take away expenses from your income for the month. If you still have some money left, then it’s saving on top of the direct deposit that you hopefully have made through your company. Just because you have saved it, don’t try to spend it on parties and such. Don’t impress friends with money.
If you have spent more than your paycheck (forget the direct deposit), find out why. In the expenses list above, you probably have spent extra on food, clothing and entertainment and (for guys) on your girlfriend. Some folks may tell you it’s not gentlemanly to not pay for your girlfriend. That’s a lot of bullshit. On the same token, it’s not ladylike to live on someone else money. She must share entertainment expenses with you.
Take a Hard and Bold Look at your finances
However, don’t despair! You can solve a problem only when you recognize it. That’s the very basics of creating a budget so that you know where the problem lies when it comes to your expenses. Only then you can devise a strategy about how you can get your financial situation on the right track.
Don’t be afraid to open up your financial book. No matter how hard it is, it might be the only way to look at your income and spending – the money coming in and the money going out. Even if lightening has struck your finances and you feel you are getting into debt, now is the time to wake up and smell your finances.
There are three big areas you can manage your finances:
Manage discretionary expenses
Food is a necessity but some folks buy more than three cups of Starbucks coffee a day at more than $5 a cup. The irony is they are the ones who complain the most about living from paycheck to paycheck. Make coffee at home. Eat more at home. Cut down on your premium cable channels. They show repeats several times a day anyway. Americans complain the most about their finances especially the folks who spend more than they earn.
Increase income if possible
In addition to lowering your expenses, you can think of ways to increase your income. One of the ways is to turn your hobby into a business.
Manage your credit and debt efficiently
This might be the most important aspect of your finances. If you are charging purchases with more than one credit card a month, consider consolidating your bills into one monthly payment. If you are struggling under student loan debt, contact your lender to see if you qualify for loan consolidation.
Instead of making equal payments on your credit cards, most experts will tell you to pay as much as you can afford on the one with the highest interest rate. When the balance is paid in full on one such debt, close the account and move to the next highest interest rate debt. This blog and numerous others have described in detail how to reduce and eventually eliminate debt.
In a Nutshell
The best way to evaluate your spending habits is to develop a budget. The basis of managing your money starts with a budget, and with proper care, you can develop it into your financial well-being for the rest of your life.