The First Habit To Form

In my last post I gave a simple overview of how to create your very first budget. In my example with $1000 fixed monthly income, I estimated about $350 left over after essential payments such as rent, utilities and groceries (realize that my example was grossly simplified). This short article will look at recommendations of what to do with that "excess" cash.

The first thing I do at the beginning of the month when I am formulating my monthly budget is to do what many financial experts call "pay yourself first". This means that before you choose to budget your excess money for anything else, you take a certain amount and put it into a savings account or some other long-term storage (this could be a typical savings account, high-yield savings, money market account etc.). This ensures that no matter what, you are putting away money for the long-term. This continued practice can lead to great wealth later in life, the keys to success are making it a habit, and increasing the amount as your pay increases. With a fixed income of around $1000 a month and the expenses given in my previous example, I would suggest putting away at least $100 a month. This would leave you with $250 in excess spending cash to do with what you please- buy clothes, eat at restaurants etc.

This is one of the most important financial habits you can form at a young age - continuously putting money into a long-term savings that will pay you through interest. As this wealth grows and you become more financially literate, you may choose to invest this wealth elsewhere for the opportunity of higher returns.

The Road to Savings - Creating a Budget

    Creating a budget has been the most integral step in my journey to becoming financially responsible. It is a skill that is seldom taught in school, but I believe is one of the most important life skills that one can have. Creating and sticking to a budget allows you the freedom of knowing that you will have enough money for what you need throughout the month. Below I will list the steps that I used to create my very first budget.

There are two basic schools of thought when it comes to creating a budget. You can choose to physically hold onto your money, choosing to keep it somewhere in your home or office. Or you can choose to manage your money electronically. Personally, I believe that physically handling the money makes it easier to keep track of spending and helps keep one from overspending. The method that I've chosen to use and have had success with is the simple "envelope" method. There are various websites that provide spending trackers and budgeting tools if you choose the high-tech method (www.mint.com is one such website) but I think that for a beginning budgeter, physical cash is the way to go.

The first step in creating your budget is to figure out your total monthly income. This is how much money you have to spend each month before any expenses. The next step is to figure up your guaranteed monthly expenditures, such as rent/mortgage/utilities/fuel/groceries. It will take some trial and error over time to realize just how much you need to set away at the beginning for something like groceries or gasoline because these have varying prices. Once you have a ballpark idea, you can average it out or put aside just above what you know you will need, to be safe. With the envelope method, you will physically label an envelope for each category and put the corresponding amount of money that you budgeted for each category in the correct envelope. Once the money in each category is gone, you have no more for that month. Being able to see at any time how much is left makes it easier to stay on track with your spending than checking it electronically, in my opinion.

Here's an example budget:

$1000 Per Month Fixed Income
-$300 Per Month Rent
-$50 Per Month Utilities
-$100 Per Month Gasoline
-$200 Per Month Groceries
This leaves you with : $350 Dollars.

This remaining $350 dollars is yours to do with what you please. I recommend delineating more categories for this flexible income, such as: entertainment, savings etc.

Once you have a budget set, and you know that you have your amounts set at reasonable values for each category, I believe it is most important to create a category for savings that you put away each month out of the flexible income you have left over. I choose to do this at the very beginning of the month, before I have paid anything off. Although this limits my flexible spending money, it ensures that I put some money away every month, no matter what.

A word on credit cards: For those first starting out in the world of personal finance, credit cards may seem like a godsend, allowing one to pay off purchases later if the cash is not currently available. It doesn't take much thought to realize why this could be problematic, simply look at the amount of credit card debt that the average American has today. Although building good credit is important, I would recommend straying away from credit cards until one is completely financially stable enough (I.E. steady income, solid budget and ample savings) to be able to pay off the cost of a small miscalculation.

Creating a budget is one of the first steps a high-school or college student can take to help transition into financial adulthood. Best of luck, and I invite anyone to comment below with any questions or comments about this article, or budgeting in general.

The Simple Frugal - Mission Statement

    The purpose of this blog is to document my transition from life as an undergraduate college student, into independent adulthood. Specifically, my forays into simple living and living on little money. This will serve as an open forum for discussion of saving money, self-reliance and making ends meet on a low budget. In an age of compounding college debt, I wish to explore the many ways in which young people all over can save money, create savings and pave the road to a financially stable future.