I sat at my desk, working furiously on my ever-growing to-do list, focusing on the one thing I had been avoiding for weeks: balancing my budget.
The familiar chime of iChat rang as a message from my friend popped up.
"Hey. How are you?" he asked.
"Doing alright. How about yourself?"
"Doing pretty well. What are you up to?"
"Balancing my budget."
"Well, aren't you such a responsible little college student."
I laughed, but the comment surprised me. Didn't he balance his budget regularly too? The answer, it turns out, was no.
A Budget... What's That?
If you're like many of my friends, you entered -- and potentially finished college -- having little to no worries about money. Your parents helped you pay for a lot of things and even if they didn't, the only kind of "budgeting" you did was checking your online bank account to see if there were adequate funds in it before going out with your friends. As long as there was money in the bank, you didn't care where it went or what you spent it on.
But soon after you received that lovely piece of framed paper, reality hit -- and it hit hard.
Suddenly, you didn't just have to worry about clothing, food and gas. You had rent to think about and bills to pay. People kept telling you that you need to save for your future, but you already feel like you're living paycheck-to-paycheck and the only way you can save is to live in a cardboard box or starve. It's scary to realize that after graduating, the real world comes fast and proper money management is an essential part of being a successful adult.
When I graduated from college, I had very little worries about money. Thanks to my parents excellent financial management skills, I graduated without any debt so my only worry was whether or not I was going to find a job and, once I got a job, I went right to work setting up my budget.
I set up my first budget at the age of 12 after I acquired my first "real" babysitting job. My mom and dad took me out and got a simple envelope system that I got set up rather quickly. One envelope was for saving; one envelope was for spending; one envelope was for gifts; and one envelope was for giving. I had a set percentage that I would put into each envelope after every allowance, babysitting job or moneymaking venture, and I wasn't ever allowed to pull out of one to feed another.
When I turned 14, I set up my first checking account and over the years, the envelopes have expanded to include a variety of other categories including my cat, my cell phone, car insurance, rent, clothing, and other essentials and non-essentials.
This allowed me to stay on track with my spending all through high school and college and gave me the tremendous advantage of graduating college with absolutely no debt. I found that as long as I was keeping track of how much money I was taking in and where I was spending it, I could keep myself in check and not find myself with a $400 shopping bill at the end of the month with only $200 to pay it.
Now you might be thinking...a budget? What's that? You've probably heard of one, but maybe never really used one. You might know that it's a good idea to have one but not have any idea how to set one up, how it practically works, and how to make it a help instead of a hindrance.
Building a Basic Budget
As I said, I've been budgeting my money since I started making it at age 12, so essentially, I've been budgeting my money for 13 1/2 years. That's quite a while. There have been times when I've done a really good job with it and other times I haven't (like that one semester I didn't pay attention to my money at all and spent $1000 on non-essentials in five weeks...ouch!), but now that I've graduated an am a "real adult" and have to worry about things like rent, insurance, and utilities, I've had to be very particular about paying attention to how much money is coming in, how much money is going out, and where that outgoing money is going.
The principle of budgeting is really quite simple. According to entrepreneur and financial expert, Dave Ramsey, budgeting is controlling your money so that it doesn't control you. Essentially, if you designate where your money is going to go before it goes there, then it will do what you want it to do.
The first thing to do when setting up a budget is to identify your essentials. Those are the things you absolutely cannot live without. Generally, these include housing, food, utilities, and not much else. Depending on your work situation and transportation, gas or bus fare may fall under that "essential" category as well (because you obviously can't work if you can't get to work). Once you've defined your essentials, determine exactly how you need to spend on those each month and don't change it. For some of those fluid essentials (like groceries and utilities), budget high. It's better to budget too much and have money left over than to budget too little and overdraw your account.
Take care of your essentials first, before anything else. And just as a clarification, "food" does not mean eating out. Fast food/restaurants are not an essential. "Food" means the minimum amount of food you need to survive at the lowest cost, which means groceries, because groceries are a lot cheaper than eating out.
Once you've got your essentials set up, you have a bit of room to play. You really can spend the rest of your money however you want. If you want to save it, then budget money into savings. If you want to spend it on clothing or travel or whatever, then budget your money for that.
Another important thing to do when setting up your initial budget is to make sure it's a zero-based budget. This means you budget all of your money before you spend it. There are some rather flexible categories like personal spending, health and beauty, and even groceries. Unlike insurance or rent, you won't spend the exact same amount of money in these categories from month to month, but it's important to budget your money so that all of it is designated toward a particular category before the spending begins, that way you know exactly where it's all going and your spending doesn't get out of hand.
Have you ever made a budget before? Does it seem confusing? Frustrating? What are some topics you'd like me to cover in future Financial Friday posts?
----------Like what you're reading? Consider liking me on Facebook or following me on Twitter!
The post Financial Fridays: So, What's a Budget? appeared first on Shades of Shayes.
