Dec 19 2008
Budgeting 101
Setting up a budget is one of the most important steps in getting control of your money. In order to set up a budget, you need to know where your money is going. Keep track of everything you spend money on for a month or two. You will be quite surprised to see how much money you spend. Add up how much you spend on certain categories:
- groceries
- eating out (I would include trips to the coffee shop in this category)
- gas
- household and hygiene products
- other miscellaneous things you may buy on a regular basis
Next you will need to look and see what your bills are each month:
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I’ve included the budget spreadsheet, that you can download here . You will also want to figure out how much you spend a year on things like gifts, greeting cards, and other expenses that come up during the year. If you don’t know, just estimate what you think you spend. Estimate a little high; you can always change the amount if needed. Put these in the other expenses column of the spreadsheet. The next step is to figure your income and other money that is coming into your household, like child support. You can also put the amount of your tax refunds in as income if you would like, but I do not. I figure this as extra income that I don’t plan on.
After you have all your expenses and income figured, subtract your expenses from your income. You can use my spreadsheet to automatically figure out how much you have extra a month. Anything extra should go either into a savings account or for retirement.
1. SAVINGS - I suggest that you open an online savings account. You get a lot more interest than at a traditional bank. Some popular online savings accounts: Capital One, ING, and IGo Banking. You should have a few different savings accounts:
- Emergency Fund - Many professional financial planners suggest having an emergency fund of at least 3 months of expenses, I feel this is unrealistic for most people. Simply start out with a goal of $500 or $1000. When you meet your goal, set a new one. By having at least $500 in an emergency fund, you will have it in case you need to fix the car, repair an appliance or other small emergency. This way you do not need to charge these expenses on a credit card.
- Gift Fund - Putting money away for gifts, especially for Christmas, keeps us from charging it. Putting a little away each week is better than trying to come up with a big chunk of money all at one time.
- Incidentals Fund - This account is for those things that always come up, but you can’t always plan for them. For example, fees for your kids to play a sport, kids selling things for school or organizations, and anything else you can think of. Also, if your employment requires that you need to constantly look good and buy clothes, I would add to this fund for that.
2. RETIREMENT - If you do not have some type of retirement savings, start saving now. Even if you’re 20, it’s never too early to start saving for retirement. The sooner you start the more you will have when you go to retire. If your employer offers a 401k, take advantage of it, especially if they do any matching. If your employer does not offer a 401k or you would like even more savings towards retirement, you can open a Roth IRA (if you make less than 100K) or a regular IRA. Start saving now! If you put $50 in a bank and are getting a return of 6% (conservative figure)you will have over $50,000 in the bank in 30 years. You have only contributed a little over $18,000. Isn’t compound interest wonderful? Here is a compound interest calculator so that you can see how much you can save.
In order to save more money, just look at your expenses and bills and see what you can cut or reduce. Do you really need a cell phone and a home phone? Can you reduce your eating out budget by eating out less or eating at cheaper places? Ordering tap water is a way to save money and it’s good for you. Be prepared to change your budget as you see how it is working for you.
