Many of us 9-to-5 newbies may think that monitoring spending is much too onerous and complicated, but budgeting doesn't have to bog you down. Just understanding how and where you spend your money is an essential start.
To begin, make two lists: one for what you have to spend your money on each month and one for what you want to spend it on. Making these lists is really the most time-consuming part of starting a budget, but it's worth it.
If you're having trouble remembering how you spend your money, there are plenty of ways to get a glimpse of your outflows. If you are a big debit card user, you can print out a bank statement every month to see where your dollars went. If you use credit cards a lot, your statements and the handy spending categories that most cards provide will help you retrace your steps.
- In pictures: Nine essential wealth builders for college grads
- In pictures: Best credit card rewards programs
Is the sell off in Citigroup overdone or just the start? How about GE and BAC? Click here for updated buys and sells in Dow Theory Forecasts.
While not the perfect approach, Web sites Mint.com or Wesabe.com are tools that allow you to upload your credit and debit card expenditures, breaking them out into different categories.
Especially for those of you who use mostly cash, you could take the old fashioned approach and write down everything you spend your money on for a week or month. Such a spending diary can be helpful for getting a handle on your expenses, and it can make for good reading when you're much older.
Anita Grossman, a financial planner with Lincoln Financial Advisors, says your list of "haves" should include housing (rent and utilities), land-line and mobile phone fees, groceries, transportation (gas, car payments, car upkeep, car insurance or public transportation fees), and health care costs. You should also include in the "haves" list your monthly debt payments and monthly contributions to your savings. "Savings and debt repayment are both necessary fixed expenditures," says Grossman. "Don't treat them as optional."
Paying off debt is critical. Make sure you put enough in your budget each month so that you are actually reducing the principal of what you owe. Making only the minimum monthly payment is a surefire way to keep on paying off that credit card well into middle age. Put more money toward paying off debt with a high interest rate, such as credit cards. You can afford to take a bit longer to pay off low interest debt such as student loans.
- In pictures: How credit card companies pick your pocket
- In pictures: Surviving moving back home post-college
Growing your savings is also a goal of budgeting. No matter how much it might pain you now, savings is mandatory--unless you have already cultivated a taste for cat food that you hope to indulge when you're old.
This means that you need to treat contributions to your 401(k)s, emergency funds, Roth IRAs and other savings vehicles as automatic. Try to save at least 10% of what you earn so you can still have a comfortable lifestyle in the future. (Check out Forbes.com/tools for a bunch of useful calculators to help determine what you should be saving now in order to meet your future financial goals.)
Your list of "wants" is trickier to manage. These are usually smaller purchases that can add up to large amounts. I suggest breaking up your "wants" into two groups: purchases that can help you move forward in life such as a professional wardrobe, gym membership or more education, and then the expenses that may be part of your lifestyle today, but which you could live without. We're talking here about "entertainment," a catch-all category of pleasure that includes expenditures at bars, restaurants, movie theaters, airlines, videogames. Almost everyone spends some money on entertainment, but be frugal. These purchases may seem to be worth it today, but always think about the future.
There are many tools you can use to actually put the budget together. You don't need to publish it in a leather bound book, but it helps to be able to see it. Sites like Mint and Wesabe have useful spreadsheets that calculate how in line your spending is with your earnings. You can also use Quicken, or make your own in an Excel spreadsheet.
If you make the not-so-shocking discovery you're spending too much compared with what you earn, you'll have to do some tweaking to your budget, in some cases making major lifestyle changes. Either bring in more money or spend less, your choice. No one wants to have to take a second job, but it's always an option; even that extra $100 a week you could earn babysitting may make a big difference in bringing your income up to the level of your outgo.
Once you've established a budget, be sure to stick to it. Try to reference your budget bi-weekly to check that you're staying on track. If you stay disciplined, you may even find you're saving a decent amount of money and have leftover cash to invest.
Many people develop a unique method for managing their budget. Some go as far as dividing cash into envelopes for their daily spending. I suggest using direct deposit whenever possible, unless you find the ambiance of crowded bank lobbies on Friday afternoons to be irresistible attractions. With direct deposit, you can have your paycheck put right into the bank and you never lay your hands on it. Almost all banks offer free, automatic bill paying, so set that up to make sure that you'll have most of your basic needs covered. Find another bank if yours does not offer bill-paying, or if they try to charge you for it.
Adjust how you think of a budget. Budgeting is a useful tool and a very important habit to establish now. Just look at billionaire John D. Rockefeller. As rich as the oilman was, he wrote down every single thing he spent his money on in a little red book from the time he was 17 years old. It seems to have worked fine for him.
