Youthentity column: Budgeting in 6 easy steps
“The person who doesn’t know where his next dollar is coming from usually doesn’t know where his last dollar went.”
Budgeting. The word alone sounds clunky, maybe a little boring, and not a lot of fun. But it doesn’t have to be painful; in fact, budgeting can be interesting, and often brings much-needed clarity and confidence into the lives of those who embrace personal money management. Recently, Youthentity collaborated with Aspen Family Connections to create a starter budgeting tool for their clients, and in the process were struck by the ease with which a simple budget can be crafted.
Part of having a budget is simply understanding where your income goes each month. If you find you have an excess of dollars after paying for life (rent, utilities, car payments, groceries, etc.), then congratulations! That excess can be turned into a savings goal, helping you to eventually buy a home, car, max out Roth IRA contributions, or start that ever-important emergency fund. You control your money, telling it where to go and what to do.
Conversely, if you spend more than you earn, money controls you. A close look into your finances will provide a clear picture of what your money is doing each month and year, allowing you to adjust accordingly. Remember: your budget won’t be perfect, and that’s OK! In some months you’ll spend more than planned, and others you’ll spend less. The point is to track and understand needs, wants, and spending patterns.
Grab a pen and paper — or go to our ready-made budget tool at Youthentity.org — to start crafting a budget in six simple steps.
Step 1: Calculate your income. Grab your most recent paystub or bank statement to see how much money was directly deposited into your account. The amount you write into your budget is based on net income, or earnings after taxes. If you have multiple jobs or income sources, add them together. If your household has more than one earner, add both incomes.
Step 2: List all expenses. To have a successful budget, each regular expense should be accounted for, from rent or mortgage to daily vending machine snacks. Some expenses will change each month; it helps to review bank or credit card statements and write down everything you’ve spent money on recently as well as upcoming expenses such as loan payments and credit cards.
Step 3: Separate needs from wants. Review all of your expenses and mark each one that is a want instead of a need. To determine needs, ask “Will my family be able to survive without this?”
Step 4: Identify savings goals. If you don’t have a current savings goal, make your goal to build up an emergency fund (money for unforeseen circumstances such as losing a job). Even if you can only save $5 a month, start saving it now. Your future self will thank you!
Step 5: Categorize spending. For example, if you have a $300 car loan payment, $100 car insurance premium, and spend $200 on gas, you would write $600 in the Transportation category. Do this for all expenses (health care, housing, utilities, entertainment, etc.).
Step 6: Review, revise, repeat. Repeat this exercise weekly, monthly and yearly (or as often as you can). The more you review your budget, the more comfortable you’ll become with sticking to it and paying yourself first.
Money management doesn’t have to be an albatross. As with most things in life, it starts by putting one foot in front of the other.
Kirsten McDaniel is Executive Director for Youthentity.
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