I've had numerous conversations about money matters with one family member (whom I will lovingly leave unnamed). This loved one recently graduated college and is wondering where his money is going each month. After discussing his obligations, we determined that he has roughly $800 to $1,000 each month after everything is said and done. He believes budgeting can be messy and doesn't want to try it, but he hates feeling like he's broke at the end of the month. Over the past several months, I've helped him get a grasp of what works best for him by breaking down the benefits of budgeting into three steps.
I am trying to get him to feel empowered, rather than broke, at the end of each month. Same for you. Whether you call it a budget a personal spending plan or something else, create something for your personal situation
Know What You Earn
While it might seem obvious, you need to know how much income you make each month. This should include what you're bringing in through your day job and what you make in your side hustles.
By not knowing what you make each month, you're like a mechanic trying to fix a car without all of your tools. You might be able to get part of the problem fixed, but you'll be held back. With finances, you want to know what you're going into each month with so you can make informed decisions.
Know What You Spend
The next vital step is knowing where your money is going each month, like:
- Cell phone bill.
- Personal spending.
- And much more.
If you're lost about starting, options include Mint, Manilla to plain old Excel. Find what works best for you and run with it. Many of these programs are free or very reasonable in price.
Know What's Left Over
This is where my family member got lost. He had no idea what he had left over at the end of the month. Coupled with some mindless spending, he was wasting his hard-earned money. The money you have at the end of the month is your money -- for paying off debt, saving for retirement to whatever else you want or need.
The key is having a plan. This will help you avoid mindless spending and force you to come up with goals for your money. After all, who doesn't feel good after reaching a goal? You just need to determine your financial goals and how your money can best reach them.
My family member was concerned that he was spending too much on items that provide him no value. After determining what he has left at the end of each month, he now has comfort knowing what he can spend and what he needs to put in place to reach his goals. That really is the best of both worlds.
John Schmoll is the founder of Frugal Rules, a finance blog that regularly discusses investing, budgeting and frugal living. He is a father, husband and veteran of the financial services industry who's passionate about helping people find freedom through frugality. He also writes about growing your wealth on Sprout Wealth.