I think one of the worse things our school system does is Not teach children the importance of budgeting. I grew up in a household that was very fiscally responsible and I was taught the importance of a dollar from a young age. For example, I had a spreadsheet to track spending and savings. I had a savings account and encouraged to think of it for long term goals. I was probably the only six-year-old thanking people for birthday checks by telling them I’d use it to buy myself a pink motorcycle in ten years. (P.S. never bought the pink motorcycle, it ended up being a used Green CRV I nicknamed Lucky). It was a normal part of my life and I was very fortunate to grow up learning those lessons.
On the other hand, I have friends who constantly struggle with money. I’ve had coworkers who made the exact same amount as me, end up with single digits in their accounts by the end of the month and have no idea where their paychecks went. I have friends who call their credit cards magic money and have piles of debt to prove they believe it. I have a friend who had no idea you could end up owing money at tax time. I have friends who have no idea what a budget it is or how to create one for themselves. I see them constantly struggling because they were never taught the basics of money or interest rates or the complicated nature of taxes and fees. It’s really depressing that such a basic life skill was never covered in our schools.
This is my first post in the 101 guide to finance series
- Know where your money is going
It is so easy for your money to be spent and you never realize it. Your paycheck is direct deposited into your account. You pay by debit card, credit card, paypal, venmo, or some other electronic source. It is easy to never see your money, to forget that there is a finite resource behind that pay button. That doesn’t mean you have to switch over to all cash. Electronic systems can be great for tracking your money because there is always a record of each transaction. You can look at your monthly statement or set up text alerts.
What I do is I pick a random month, usually within the last three, and I write out every expense and transaction in a free spreadsheet. I then label each expense into a category and rank if it was a need or a want. For instance, pharmacy co-pays go under my medical category and are a need unless I want to be a sneezy asthmatic mess. Ordering pizza out because I was feeling too lazy to make the frozen pizza in our freezer is definitely a want.
- Figure out where you actually want your money going!
This is the actual tricky part of finances and it’s because it is completely personal. What you consider important in your life is going to be unique to you and there is no judgment around that. There are some categories where our money has to go no matter what we want and those categories tend to include rent/mortgage payments, utility bills (water, electric, heat, internet, phone, etc.), taxes, medical expenses, fees (driver’s license renewals, pet registrations, car inspections, etc.), and other necessities (bus passes, gas, child support, debt payments, etc.)
For your first budget, keep the categories close to what you’ve historically spent, changing only those categories of wants that you know you can easily adjust. If you drastically change everything, you are more likely to set yourself up for failure than for success. Success is key, and you can change your budget (Shock! I know, budgets aren’t static things carved into stone) as you make your lifestyle changes.
Other tips for your first budget?
Pay yourself first with savings so you don’t see the extra money at the end of the month (if there is any) as free spending money.
Account for annual and surprise expenses. Annual or semiannual expenses are usually what breaks a budget. Things like holidays, car expenses (inspections, registrations, winter tires, and repairs), vet visits, routine medical bills, or even insurance payments should be expected and saved for a little each month if you can.
Most importantly find what works for you and stay positive! Even if your first budget shows you as completely overdrawn at the end of each month, you are still a step closer to closing that gap and becoming more financially stable.