A budget is just a fancy way of saying a “plan for your money.” Anyone receiving money on a regular basis, whether it be allowance or salary, should have a budget. This tells you exactly where your money goes, so that you only spend what you have. It’s easy to start a budget, but will take some discipline to stick to the plan!
Money Out = Money In
With just a bit of addition and subtraction, you can create a budget. Add all the money coming in, and then subtract every expense line-by-line. Once everything is subtracted, did you get zero? If you get a zero, that means your money is perfectly balanced between what you spend and what you make. If you get more than zero, you can afford to spend more or add more to savings. If you end up with a negative number, you either need to earn more money or lower some expenses.
Share and Save First. Then Spend.
A budget works best when you account for the 3 S’s in the following order: Share, Save, Spend. Treat money you share and money you save as expenses that get subtracted … first. This will get you in the habit of recognizing what you can afford to spend.
Should Credit Card Spending Be Its Own Expense?
The quick answer is NO. Credit cards should not be considered its own expense category on a budget. Since purchases placed on credit cards reflect specific expense categories, the purchases belong in their rightful categories. Say you used a credit card to buy clothes for $20. That $20 gets categorized as “Clothing” or “Shopping.” The exception to this rule is if you are paying off existing credit card debt, you should include an expense line for “Debt Payoff.” We’ll talk more about credit cards in the future.
Monthly vs. Annually
A budget, or plan, works best when you can follow it. Most salaries and bills come on a monthly basis, so I recommend creating a monthly budget, in order to follow along more easily. Just remember to divide any income or expenses that happen once a year into a monthly amount. For example, car registration tabs get renewed annually, so divide the expense by 12 to account for them each month. You may also consider taking the sum of your electric bill over 12 months and listing an average amount each month because costs vary during the winter vs. summer months.
You Did It!
You just created a budget! Stay within your limits when spending in each category. Update the budget with any new changes, and monitor your progress at least once a year. Remember, a budget is only as good as you make it, so be honest with yourself!
Homework: Get started on your own budget! Parents can involve children by working on the family budget together. Did everything balance out to zero at the end?
Now that you are an ace at budgeting, are you ready to balance a checkbook? Tune in next week to learn more! Or subscribe below to automatically receive weekly lessons in your inbox!