When it comes to “budgeting,” many people find it right up there with dieting and root canals in terms of the pleasure factor. However, tracking your spending and disciplining yourself to live within your means and save for the future is definitely worth the effort, however unappealing it may be. If budgeting is not a natural bent for you, don’t give up on the idea altogether. You just need a willing attitude and some good resources to help you stay disciplined and on track with your finances. There are actually lots of creative ways to make budgeting work for you. It’s necessary for all of us.
- The basic report you should complete (on a monthly or quarterly basis) is a cash flow statement. This report tallies your income and expenses in several key categories. It’s the surest way to see whether you’re living within your means and where your spending may be excessive. After subtracting all of your expenses from your income, you’ll see whether your net cash flow for that period is positive or negative. Remember, the goal is positive, positive, positive!
These days, there are any number of online tools that can help you analyze your cash flow (e.g., www.quicken.com and www.mint.com). In the past, analyzing cash flow was a lot more work—you had to save your receipts and organize them manually. But now, thanks to debit cards and online banking, it’s much easier. You simply link your bank account to your budgeting app or website and it will track your spending for you! You can even opt for the service to send you alerts if you are over budget in a particular category.
- Set your budget. For young adults just starting out, tracking their spending will help determine how much they can afford for rent/housing and a car (significant expenses each month) and give them a general idea of a budget for each category. How much should average living expenses represent? The following are typical expenditure categories and some suggested percentages for each:
- Housing/rent (includes utilities) 30-35%
- Household/personal items 20
- Autos/transportation 10
- Charitable giving 5-10
- Savings and investments 10+ (not an expenditure per se)
- Entertainment and leisure 7
- Debt/loans 5
- Insurance 5
- Miscellaneous 3
- Finally, it helps to develop up-to-date cash flow statements when you’re considering buying a home or car. People especially get into trouble when they pay too much for a car or rent an apartment that’s out of their financial reach. As a result, there is little leftover for investing in the future, surprising that someone special with an unforgettable evening, or giving to charitable causes.
When you know where your money’s going, you are more likely to make wiser financial choices and develop good savings habits that can help you build wealth for your future.
Do you track and analyze your spending? How do you do it? Have you trained and modeled this to the young adults in your life and, if so, how? We’d love to hear your insight and experiences!