Growing up, you may have eagerly looked forward to being on your own. No one telling you not to eat pizza for breakfast, being able to stay up all hours of the night, putting whatever you want on your walls – what is not to love about it? However, now that you are actually on your own, you may be a little, well, terrified. Along with adult freedoms come adult responsibilities, such as getting a car, renting, establishing your credit, and managing your money so that you can pay all of your bills and still have something left over for savings and fun. Unfortunately, personal finances is a topic that is seldom taught in school. But don’t worry, this guide provides you with what you need to know to succeed on the road to financial independence.
Chapter 1: Money Management
The most common cause of financial problems, such as having credit card debt or not being able to pay bills or save, is spending more than what you are earning. How can you avoid being in this state? One of the best tools for managing your money successfully is to budget. You may be groaning right now, thinking budgeting is about as much fun as taking a trip to the dentist, but it is actually a fairly painless process. A budget is simply a plan for how you will spend your money. It does restrict your spending, but it can also help you ensure that there is enough money to do the things that you want to do.
The first step in creating a budget is to write down what your income and expenses are now. You can use the Budgeting Worksheet (download below) or create a spreadsheet on your computer. To get a per-month amount for periodic or variable expenses (yes, things like gifts and concerts count, even if you only spend money on them once in a while), total up what you spend per year and divide by 12. What if you are not sure how much you spend on some expenses? Just use your best guess for right now. Then, track your expenses for a month or two (you can use the Tracking Worksheet, a piece of paper, a computer spreadsheet, or budgeting software), so that you can correct any inaccuracies.
After you list everything, total up all of your expenses and subtract them from your income. If you are spending more than you are earning, you will need to make changes. If your income is $1,800 a month, but your expenses are $2,300 a month, long-term, there is no way you will be able to pay all of your bills and save without relying on credit – or the bank of Mom and Dad (which will probably not stay open forever). Is there any way that you can increase your income (e.g., get a part-time job or work overtime)? Are there any expenses that can be reduced, postponed, or eliminated? Be honest about what is a necessity and what isn’t. (Eating out for lunch every day or having cable television is nice, but you don’t need them to live.) List any changes you plan on making in your budget.
Even if you are not currently spending more than you are earning, it is a good idea to review your budget and think about if you want to make any changes. Do you want to take art classes? Go on a nice vacation? Save more? (Saving is something that everyone should do. In addition to saving for specific goals, such as a down payment on a house, it is wise to establish a general emergency fund. If you have an unexpected expense or lose your job, that emergency fund will allow you to pay your bills without relying on credit.) If adding money for these expenses puts you in the red, see what else you can cut – remember, your expenses should never exceed your income.
Once you create a budget, the hard work is over, right? Not exactly. In order for your budget to be useful, and not just a scrap piece of paper, you need to follow it. Tracking your expenses on an ongoing basis is a good way to know when you have reached your spending limit for the month in a particular category. Recording your purchases at the end of the day should only take a few minutes. (If you use budgeting software that links to your checking and credit card accounts and automatically imports and categorizes your purchases, the process is even easier.) If you are finding it hard to stick your budget on a regular basis, some of your figures may have been unrealistic. Go back over your budget and make adjustments. Perhaps you realized you cannot live on rice and beans and spend only $25 a month at the supermarket, but you can spend less money on clothing.