With all of the talk about the credit crisis and the great recession, being frugal has suddenly become super-trendy. Overspending is a thing of the past, but having nice things will always be in style. The key is finding the right formula to make the most out of the resources at your disposal, and learning how to budget can help. Unfortunately it took me a long time to figure my formula out. Thankfully, I had a wonderful economics teacher who encouraged me to create a budget so I could see where my money was going. Believe it or not, between my modest allowance and a part time job at a coffee shop, I was able to buy my dream car! Here is how I would recommend getting started:
Step 1: Take Inventory
Take note of how much cash you have coming in, a.k.a., your income. Figure in your allowance, birthday and holiday money, babysitting cash, lawn mowing moolah. Whatever form of income you have, write it down. Microsoft Excel is a great way to keep track and has built in math functions you can use to total columns.
Step 2: Track Your Spending
Take note of how much cash you have going out, a.k.a, your expenses. Keep track of how much you spend, and what you spend it on. If you have a smart phone, you can use an app to keep track. There is a great app called “I Was Broke. Now I’m Not” Another popular one comes from Mint.com. It will show you how you spend your money by category, giving you a visual picture of where it’s going. If you’re not into apps, just keep all of your receipts, and at the end of each week sit down and track them in the same Excel spreadsheet with your income.
Step 3: Separate Needs vs. Wants
Look at your spreadsheet and figure out what you need to spend your money on versus what you want to spend your money on. If your expenses outweigh your income try to aggressively cut down frivolous items in those categories. You may really want a shiny new phone, but you may need to pay for your car insurance so you can get to school.
Step 4: List Items You Really Want
Make another list of all the things you really want, like concert tickets, a new game system, or designer purse, but don’t be too short sighted. You might also want to think about starting to budget and save for college or your first apartment so you can move out of your parent’s house. Write down how much you estimate these to cost, and figure out how much you can afford to put towards saving up for them each week, and how many weeks it will take to afford it. If you’re loyal to your plan, you can be texting on your new phone or driving your new ride around town with pride.
Step 5: Open a Bank Account
If you are old enough, open a savings account for yourself, or ask your parents to help you open one. Try not to take any money out until you have enough saved to buy the thing you really want. Simply put, know what resources you have available and live by the “everything that you need, some of what you want” rule. I think you will find fiscal responsibility surprisingly rewarding. Here’s a sample budget for teens to help get you started. Have you set up a budget before? What tips or questions do you have?