When just starting out in the world of finances, the entire thing can seem overwhelming and daunting. It may seem like a lot of fun to jump right into the world of investing, but there are some preliminary steps everyone should be aware of before that. The first thing to do is to get a feel for your finances. How much money is coming in and how much is going out. In essence, creating a budget to keep track of where the money is going.
What is a Budget?
I am always surprised when I talk to people and find out that they do not know how much they make. They have a general sense, but for the most part there are a lot of people that have no idea how much they bring home every month. These are generally the people that also do not know how much they spend every month. Before any financial goals can be set or acquired, sit down and write out how much you bring in. Included in this should be regular wages, side income, gifts, inheritances and any other sort of income that flows in throughout the year.
After figuring out the money coming in, you must figure out how much is going out. There are two ways to do this. The hard way is to keep track of all receipts for a few months. At the end of every month you categorize, compartmentalize, and plug them all into a spreadsheet that can be analyzed and reviewed. The easier way is to pay all your regular bills, and set aside a small portion of cash to pay for the extras that pop up, including eating out, new clothes, movies, and anything else that is not necessary to survive. Over a few months time you will get an idea for how much to designate to each category. Most people will fall somewhere in the middle. If you want to make things evan easier on yourself you can use online budgeting tools such as Mint.com.
There is no wrong way to creating a budget. Personally, I do not even use one. I know how much my regular bills are, and I know how much I need to set aside for savings, retirement, and everything else. Then I put everything I possibly can onto my credit card. Monitoring my expenses takes about 3 minutes each week to make sure there are no fraudulent charges and to make sure I am not spending too much. At the end of the month, I pay the card off completely. Anything extra I move right to savings. Some months there are bills that pop up that I didn’t account for, so I bring that money back from savings to pay for them. That is why after you have figured out your budget, you should make sure to start an emergency fund, which we will talk about next week.
Well I’m glad for that last paragraph. Here I thought this was another post that was just going to make me feel guilty for not using a budget either. I think my strategy is pretty similar to yours. I also put everything I can on my credit card and pay it off in full each month. Still I may give budgeting a try in a month or two when I see how much the income from my new job affects my spending.
I wish looking at my expenses only took 3 minutes! 🙂 Regardless, good points. I use Mint for some things. But I have an Excel sheet that I’m quite fond of. I use it to budget out for the whole year and plan in big one-time events like a vacation or Christmas. I also use it to run simulations like if we can take on a new car payment, etc.
Man, I’m not sure if I couldn’t use a budget. If I was rolling in dough or didn’t have many financial constraints then I probably wouldn’t need one. Until then, all things get accounted for.
I would like to automate as much of my finances as possible, but I have been so obsessed with tracking and monitoring that I think that would defeat the purpose. I love money management too much!
Very important article. Always shocks me when people don’t know what’s coming in and going out! I’m publishing a similar post tomorrow. It’ll contain a breakdown of exactly how I’m budgeting for starting a new job in a new city in September.
I have a budget and how I started was making sure I was paying myself first (after the fixed expenses). I know that I like to save at least 20% of my take-home pay, and from there I budgeted for each category. I played around for 3 months just to see what worked and what didn’t. The hardest part was tracking my expenses and categorizing them.