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So the first topic we want to cover here
when it comes to getting good with money is how to budget.
Now, this is probably the most important topic
that you will ever learn about when it comes to money.
And one of the things that you will
have to get comfortable with before anything else
can happen.
There are tons of different strategies
out there for how to budget and how
to make the most of your money.
And some of them are more hands-on than others.
But as I mentioned in the intro, the most important thing here
is that you do cannot wait to have a lot of money in order
to start budgeting it.
If you only have $10 a month, you
need to account for every one of those $10--
where they're coming from, and where they're going,
and then what you want to be doing with them.
But let's do a quick, basic definition of a budget.
A budget is an estimate of your income--
the amount of money you're bringing in
and have available to spend, save, or invest--
and your expenses-- all the things
that you need to spend money on.
It can be as simple as a piece of paper split
into two columns, where you jot down
all of your paychecks, gifts, and so on in one column--
and all of your bills, purchases, grocery
costs, and so on in the other.
They can, of course, also get much more complicated than that
or can be automated through various apps and programs
that help sort your budget for you.
And just like there are many different ways
to track the nuts and bolts of a budget,
there are also many different philosophical approaches
to budgeting.
Some people approach budgeting with a straightforward Pay
Yourself First strategy, where they set aside
money first thing every month to be saved before sorting out
all of the other money into different categories.
Others practice something called Zero-based Budgeting,
where every single dollar is assigned
a category with nothing left over at the end of the month.
These strategies are a bit more involved,
but they can easily be mastered once you've
gotten used to the basics of understanding your budget.
If you aren't sure of where to start with budgeting,
try keeping a money diary or writing down every purchase
that you make for a given period of time.
It will help you start to understand patterns
in your spending, so you can get an idea of how much money you
want to be dedicating to each category,
as well as some of the things that you probably
want to cut out.
But no matter your individual strategy, the most basic thing
to keep in mind about a budget is that, simply put,
your expenses should not exceed your income.
You want to finish every month in the black,
meaning that you have money left over
with which to save or invest--
but more on that later.
If you're spending more than you're bringing in,
that means you're in the red for the month,
or that you've spent more than you've earned.
And you may still owe that money, like on a credit card
or to someone you might have borrowed it from.
The most traditional budget there
is what we mentioned before, a simple list of the money
coming in compared with a list of the money going out.
You record your income and assign it a category-- things
like scholarships or bursaries, student loans, paychecks,
parental contributions, gifts, et cetera.
Now, there are many ways to budget
this income depending on how hands-on or hands-off you
want to be.
Some people swear by the old-school Google Sheets
method, of which there are plenty of examples
including on the Financial Diet.
But others, myself included, prefer apps
like Mint, which help automate the categorization
and analysis of all of your different spending and income.
Others still prefer to use a literal pen and paper
because they find that actually writing these things out
and doing the calculations themselves helps keep them
accountable and very aware of every single line
in their budget.
No matter which method you pick though,
you'll generally have some basic categories of expenses
that you'll need to track--
things like rent, bills such as your internet or cell phone,
transportation costs, food categories, et cetera.
And from there, you can get even more granular
if you're trying to see exactly where your money goes--
categories that tally up just things
like coffee expenses or purchases for a specific hobby.
In a traditional budget, each category
is assigned an amount per month.
And you may vary month to month in terms of exactly what you're
doing within that category.
But the idea is, you never exceed
the amount in any given category, which helps keep you
under budget overall.
And if you want to stick to a categorical budget
but simply don't trust yourself if you're not actually
budgeting with the physical money itself,
a similar but very tactile budget strategy
is called the Envelope Method.
You literally take a stack of on envelopes labeled
with your expense categories.
And whatever money you put in each of those envelopes
is the only money you can use for that category that month.
The Envelope Method is obviously rather labor-intensive.
But many people do find it very helpful to totally realign
how they think about money and start fresh
on a very accountable budget.
Also keep in mind, for big recurring expenses
like your rent or utilities, you may not
want to keep them in envelopes.
You may want to just simply automate those bills out
of your checking account, so you don't have so much cash on hand
all the time.
Another popular budgeting method is the 50/30/20 rule.
The bare bones of it is that 50% of your income should go
to necessities-- we'll get there--
30% goes to things that you want,
and 20% goes to savings or paying off debt.
And some people do prefer to swap those last two.
So 20% is going to wants and 30% to savings.
And this is a very effective way for many people to budget
because it's a zero-sum budget, meaning
that every single dollar is allocated.
But it's also a bit inflexible.
Because, for example, you may live in a place
where it's not realistic for your total necessary purchases
each month to fall under 50% of your take-home pay.
Here in New York, for example, you'd
have to be earning quite a lot in order
for that to be the case.
But then comes perhaps the most difficult part of budgeting,
especially if you're someone, who like me, has a tendency
to slip into that treat-yourself mentality
or confuse things that are nice to have with things
that are need to have.
And that is understanding the difference
between necessary and unnecessary expenses.
Especially when you're in a time that you
need to be really focusing on savings
and ramping up the amount that you're able to put away
each month, becoming very, very clear
and tactical about really separating necessary versus
unnecessary is of the essence.
So you have to be super honest with yourself.
What are the basics that you need to get by each month?
There should be a basic minimum grocery bill,
things like your rent-- although in many cases,
you could arguably find a different living situation
in which your rent would be lowered--
things like your basic utilities,
internet, cell phone, et cetera.
And once you have identified in a very honest and clear way
what your absolute necessary expenses are,
those need to be taken out of your budget first and foremost.
By subtracting this amount from your monthly income,
you get a clear number of what you have
leftover for everything else.
And that everything else has to represent
both your unnecessary expenses and your savings
slash debt repayment slash investing.
And don't get me wrong-- unnecessary expenses doesn't
mean you will never buy or pay for these things.
It just means that when push comes to shove,
they do not absolutely need to be included
in your monthly budget.
Things like going out to dinner with your friends,
subscriptions, gym memberships, fitness classes, hobbies,
coffee out, that kind of stuff can
be categorized as unnecessary, even if most months you end up
paying for them anyway.
And again, remember that whatever is left over
in your budget after subtracting your absolute necessary
expenses are going to be competing for space.
The more of those unnecessary expenses
that you're paying for each month, the less that you'll
have to go to savings, or investments, or things
like debt repayment.
So make each dollar count in that category.
And the best way to get a really clear picture of what
your actual necessary versus unnecessary expenses are
is to get really good about tracking your own spending
and getting a very clear picture of your lifestyle
and what it costs to live it.
This is part of the reason why one
of our first tips on this topic was
to start with something like a money diary
or writing down everything you spend on for a month or so.
Often, when we're setting out a budget for the first time,
especially if we really want to cut back or save a lot,
we have a tendency to wildly underestimate
how much we realistically spend in certain categories
each month.
And it's much better to make a realistic budget from which
you can slowly start to chip away than to try and radically
alter your spending in a way that doesn't match up
with your lifestyle, where you'll inevitably probably
fail at the budget and then, in many cases,
just stop trying altogether.
Understanding how much you tend to spend at the grocery store
every month, as well as doing a very clear inventory
of which of your more regular bills
you could probably cut back on versus the ones that
need to remain the same is going to be
extremely important to getting a realistic budget.
For example, you may be someone who
uses your cell phone all the time
for both work and personal use.
So for you, it's much more important
to just go ahead and pay for that more expensive
unlimited monthly plan than to try
and radically lower your monthly cell phone bill to a point
where you constantly end up having
to pay overages each month.
From a very clear inventory of your spending and analysis
of your lifestyle, you will be able to paint
a very clear portrait of unnecessary versus necessary
and identify the places in which you
can start to make meaningful changes without radically
altering your lifestyle or setting yourself
up for failure.
You don't have to have an incredibly strict budget
in order to get control over your money.
Sometimes, you're going to spend on frivolous things,
or make mistakes, or buy something
that you might regret.
And that's OK.
What is important for everyone though
is having a very clear understanding
of what is coming in and what is going out.
And it's also OK to experiment with different methods
of budgeting, so that you can get a feel
for what works best for you and what's more sustainable for you
in the long term.
The power of a budget is in having control over your money.
And at the very least, even if you're currently
spending more than you make for various reasons outside
of your control, you have a very clear mental picture
of what's happening and what needs to happen in order
for you to be in the black again.
And again, remember that no matter
how little you may be taking in each month,
it is never too early to start budgeting
and learning these concepts because waiting until you're
rich to have a budget is like waiting until you're
married to start dating.
Don't forget to check out the next episode
in our guide to getting good with money
for college students.
And for all things talking about money,
don't forget to check out the Financial Diet here
on YouTube or all around the internet.