I found an article on Yahoo! finance today called "Just Explain It: Retirement vs College Savings." I think that most of the people who read this blog are in still currently in college themselves, but this could become relevant to you in the near future.
Not all families choose to or are able to save for their children's education, but some can and do (this also applies to saving for LDS missions). This is something very important you should discuss with your spouse/future spouse. People tend to feel very strongly on this topic - some insist that their children should not have to worry about money while they are in school, others insist that their children need to pave their own way.
Those parents who do decide to save for their children's education have to face an important trade off between saving for retirement and saving for education.
No matter what, saving for retirement should be your #1 priority. I know that's a bold statement, but I really can't think of an instance when saving for your children's future is more important than saving for your own. That sounds really selfish, but think about it -
Your children need to learn how to save for what they want. They need to understand that things are not simply handed to you in life. They need to learn that they are adults now and their decisions are their responsibility. On top of teaching life lessons, your children have way more resources and options available to them for education than you do for retirement. Your children can take out student loans that they will have the rest of their lives to pay off. Your children can choose a less expensive college. They can work during school and during the summers. Your children have a much lower level of expenditures than you do. You, on the other hand, have a limited number of years before retirement. The more you save and the earlier you start, the better off you will be. I'll tell you right now, social security isn't going to cut it for most people. If you want to maintain your current lifestyle, if you want to travel and spend time with your grandkids,you need to save for retirement.
If you do decide to save for children's education, don't sacrifice your retirement savings. And please, for heaven's sake, don't go into debt to pay for your children's education. Remember, your children are adults when they go to college. Help them out if you want to, but don't hurt your financial future in the process. Remember, you have a limited number of years before retirement - you don't need to be spending those years paying down debt, you need to be spending it continuing to save for retirement.
Coming up next: Saving for Retirement - The Low Down
Friday, December 14, 2012
Tuesday, October 9, 2012
Supply-side Economics
By: Greg
In this blog post, I want to look at what is and isn’t “supply-side
economics,” also known as “trickle down economics.”
The fundamental idea behind supply-side economics is that
investment spurs growth. What do I mean by investment?
Investment means spending money now to generate more production in the future –
in other words, we choose to consume less today so we can consume more tomorrow.
A few examples of investments include: factories, cement trucks, education and
training programs, roads, etc. I would suggest that few people buy a factory
just because they like factories. They buy them so they can make more stuff.
The factory is an investment – it involves spending money today in order to get
more in the future. All of these investments increase output per person. If we
have more stuff but the same amount of people, then we are all richer.
Read that last sentence a few times until it sinks in.
A common fallacy is to think “Well, all that extra stuff we’re
making will just sit on the shelf because people can’t afford it!” But
remember, if there is more stuff and the same number of people who want it, the
stuff gets cheaper and we buy more. If this doesn’t make sense please comment
and I will explain further.
So what government policies would
encourage increased investment in the economy? Most economists (http://www.npr.org/blogs/money/2012/07/19/157047211/six-policies-economists-love-and-politicians-hate proposal three) agree that one of the best
ways to promote investment and hence growth is to cut or remove corporate
taxes. Businesses are the world’s investors, so if you like to promote growth,
tax them less. Many people think we should tax corporation because they are led
by greedy, overpaid executives and we don’t like that. But, if you think
someone is overpaid, tax them, not the company they run.
Another policy would be to
decrease the capital gains tax rate (a special, lower, tax paid on earnings
from stocks). The impacts of this policy are harder to see, but when we buy
stocks we are investing in a business which allows them to invest that money as
they choose. Advocates of supply side economics are highly against capital
gains taxes.
Notice that we didn’t mention
giving heavy income tax breaks to the super rich. This practice is not true
supply side economics! Though it can be argued that they are the most likely
people to invest the money which would in turn grow the economy, this is a more
indirect and sloppy approach. Though there are other reasons why we wouldn’t
want to tax the heck out of the rich, they don’t relate to supply side
economics.
100% pure, unadulterated supply
side economics would go so far as to advocate getting rid of the income tax for
all income levels. Why? Any form of income taxation discourages work. (You
might wonder how the government would be funded under this practice – tax
revenue would come from increased consumption taxes like sales taxes).
As a review, supply side economics holds that economic
growth first requires investment. Investment is choosing to consume less today
so we can consume more tomorrow. Good investments increase output per person
which makes us all richer because there is more stuff for less money. Supply
siders believe that we can promote investment by reducing corporate and capital
gains tax rates.
That’s it! Let me know if you any questions and I would be
happy to explain anything that doesn’t make sense.
Wednesday, September 5, 2012
Maintaining Your Credit Score
By: Megan
You've probably heard at least a little bit about the importance of establishing credit and keeping your credit history clean. If you ever take out a loan, your credit score will play a big part in what interest rate the bank will charge you. This is especially important when it comes to buying a home. In this day and age, it's a good idea to have a credit card.
I know I used to have a lot of questions about credit cards: is it best to carry a small balance on your card or to pay it off each month? Should I get those credit cards from stores when they tell me that opening one will save me 15% on my purchase?!
For starters, let's look at what credit evaluation companies are looking at when they give you a credit score:
Payment history: The largest chunk of your score is based on your payment history. For this reason, you do not want to carry a balance. Paying off your card in full shows that you aren't using your credit card to make purchases that you can't really afford.
Use of credit limit: The next biggest chunk is based on how much of your credit limit you use each month. The closer you get to your limit, the more nervous the banks get. Are you using your credit card to buy things you can't afford? Will you be able to pay them back? To be safe, don't use more than 30% of your credit limit each month- to be really safe, don't use more than 20%.
Credit history: How long have you had a credit card? This component is why it is important to get a credit card as soon as you feel ready for one. Even if you never use it, having the account open says a lot. Also, when you get a new credit card, never close your old credit cards. Doing so shortens the length of your credit history. You can cut the card up or put it somewhere safe, but leave the account open.
Application history: this refers to how frequently you are applying for new cards. A good rule of thumb is to not apply for new debt (a new credit card, new mortgage, refinance, etc) within one year of each other. If you are applying for credit too often, the banks get nervous about what you need all of that credit for. Only get a new credit card if you really need one or if it really makes sense.
Credit mix: this is the last category, and is very small. This refers to the fact that you shouldn't have a Kohl's, Nordstrom, JC Penny, and Sears card. This category also refers to the different types of debt. One website says, "A good mix of credit would include a mortgage, a car loan, a couple of major credit cards, and one or two department store or gas credit cards." But remember, this element of your credit score is small. Don't go out and open a bunch of credit cards because you feel like you need a good mix, especially if you feel like you won't be responsible with them.
If you don't have a credit card or are looking for a better one, I'll do another post about choosing a good credit card!
You've probably heard at least a little bit about the importance of establishing credit and keeping your credit history clean. If you ever take out a loan, your credit score will play a big part in what interest rate the bank will charge you. This is especially important when it comes to buying a home. In this day and age, it's a good idea to have a credit card.
I know I used to have a lot of questions about credit cards: is it best to carry a small balance on your card or to pay it off each month? Should I get those credit cards from stores when they tell me that opening one will save me 15% on my purchase?!
For starters, let's look at what credit evaluation companies are looking at when they give you a credit score:
Payment history: The largest chunk of your score is based on your payment history. For this reason, you do not want to carry a balance. Paying off your card in full shows that you aren't using your credit card to make purchases that you can't really afford.
Use of credit limit: The next biggest chunk is based on how much of your credit limit you use each month. The closer you get to your limit, the more nervous the banks get. Are you using your credit card to buy things you can't afford? Will you be able to pay them back? To be safe, don't use more than 30% of your credit limit each month- to be really safe, don't use more than 20%.
Credit history: How long have you had a credit card? This component is why it is important to get a credit card as soon as you feel ready for one. Even if you never use it, having the account open says a lot. Also, when you get a new credit card, never close your old credit cards. Doing so shortens the length of your credit history. You can cut the card up or put it somewhere safe, but leave the account open.
Application history: this refers to how frequently you are applying for new cards. A good rule of thumb is to not apply for new debt (a new credit card, new mortgage, refinance, etc) within one year of each other. If you are applying for credit too often, the banks get nervous about what you need all of that credit for. Only get a new credit card if you really need one or if it really makes sense.
Credit mix: this is the last category, and is very small. This refers to the fact that you shouldn't have a Kohl's, Nordstrom, JC Penny, and Sears card. This category also refers to the different types of debt. One website says, "A good mix of credit would include a mortgage, a car loan, a couple of major credit cards, and one or two department store or gas credit cards." But remember, this element of your credit score is small. Don't go out and open a bunch of credit cards because you feel like you need a good mix, especially if you feel like you won't be responsible with them.
If you don't have a credit card or are looking for a better one, I'll do another post about choosing a good credit card!
Saturday, August 11, 2012
Incentives and Unintended Consequences
By: Greg
One of the most important and talked about matters in
economics is the power of incentives, or, how a particular rule or policy
changes the behavior of individuals or society as a whole. Though not a parent
myself, I am sure that parents are constantly thinking about how particular
parenting behaviors will create incentives for good or bad behavior. One
example is how your child’s behavior might change if every time they have a
temper tantrum they get what they want, as opposed to if they don’t get what
they are screaming for. Incentives are everywhere and play an especially large
role in deciding if a particular policy is good for society or bad.
In many cases creating legislation that seems like a great
idea has really bad unintended consequences. Learning to anticipate those
unintended consequences is, in my mind, extremely important. I have an example
below and will surely return to this topic in future posts so I wanted to
introduce what I mean by incentives and unintended consequences.
Forgiving Debt
In his book “The Elusive Quest for Growth,” William Easterly
examines various efforts to help the world’s poorest countries grow out of
extreme poverty. One of the efforts he explains is the “Jubilee 2000” campaign
heavily supported by U2 rock start Bono as well as the Pope and the Dalai Lama.
Jubilee 2000 called for meaningful debt reduction (totaling billions of
dollars) for 20 poor countries. The intentions of this aid campaign were obviously
very good. Many poor countries are heavily indebted and just paying the interest
on their loans is extremely cumbersome. To aid these poor countries, wealthy
individuals stepped in and helped them pay down their debts. This movement
seems and feels right, but it had some negative consequences.
The astonishing result of this multi-billion dollar debt reduction
program is that a large proportion of these countries who received aid were even
more indebted shortly after receiving the money. The shocked Bono,
Pope, and the Dalai Lama stated that this was a result of “irresponsible
governments” which is definitely true. Easterly explained the following in his
book:
The Jubilee 2000 debt campaigners
treat debt as a natural disaster that just happened to strike poor countries.
The truth may be less charitable. It may be that countries that borrowed
heavily did so because they were willing to mortgage the welfare of future
generations to finance this generation’s (mainly the government clientele’s)
standard of living.
That’s one
explanation. But let’s also take a look at the role incentives played. Jubilee
2000 wasn’t the first movement made to forgive poor countries’ debts. This
practice has actually taken place since 1967, according to Easterly, including
a huge amount of money donated in the 1987 G-7 All World Tour. Since many of these
poor countries are used to having their debt erased, what is their logical conclusion?
Rack up as much debt as possible! Despite the campaign’s best efforts and
intentions, its real effect was poor.
Debt forgiveness is seen in other areas as well, and those
policies ring up as “stupid” to me for the same reasons as Jubilee 2000. One
example that is being pushed for right now is student debt forgiveness. Don’t forget to think about the incentives.
Thursday, August 9, 2012
Let's talk about....
By: Megan
Taxes! *cringe* Don't worry, I'll keep it relevant and important. As boring and intimidating as the topic is, it is worth having a basic understand. After all, the only things certain in life are death and taxes! You don't need to know how to fill out your own tax return - hello, it's called Turbo Tax. But knowing and understanding some concepts can help you keep track of your money better.
You know how when you get paid, the pay stub shows the difference between what you actually made and what you are receiving? The difference is what the government has withheld from your paycheck. They withhold your money to make sure they get paid what they are owed. It's kind of nice for you too, because if they withhold enough you don't have to shell out a bunch of cash in April.
Whenever you start a job, you are asked to fill out a W-4. This form is how the government decides how much money they will take out of each paycheck you get. The W-4 has you specify how many "personal allowances" you need. This is based on if you're married, how many kids you have, etc. The theory is that when you have a spouse/kids you get a tax break and don't pay as much in taxes, therefore the government will withhold less from your paycheck. So, remember, the higher the number of allowances you take, the less money they will take out. If you don't take any allowance, BAM, they will take as much as they can.
Now, of course, if they take out too much money it gets returned to you. How many times do we get a huge tax return because they took more money from our paycheck than we actually owed? Maybe you like getting a tax return, it's kind of fun, like a little present. But remember - that money is your money. You just loaned the government your money for free. Here Washington, just hold on to my money for a few months. Nah, don't pay me any interest on it, you can just hold it, thanks! Once they withhold it from your paycheck, you can't get it back until the year ends and you file your tax return. I don't know about you guys, but I have my own uses for my money.
For a lot of us, we don't even make enough money to owe taxes, so the government shouldn't be taking anything out. How do we make sure they don't withhold anything? By marking exempt on your W-4! They will still take out your social security taxes, those are unavoidable. But you will get to keep everything rather than having to wait a year to get it back!
How do you know if you will make enough money to pay taxes? There is a hurdle you have to pass before you will owe any taxes. This hurdle comes from the deductions the government allows you to take in calculating how much you owe in taxes. The first is the standard or itemized deduction. If you want to know more about the itemized deduction, ask and I'll explain, but it doesn't apply to most of us. The amount of your standard deduction depends on if you're single or married. Check out this sweet chart:
Then, if you are not being claimed as a dependent by someone else, you get what they call a personal exemption. For each member of your family; you get to deduct a certain amount. For 2012, that amount is $3,800.
You automatically get to deduct these amounts from your income, so if your deduction and exemptions are more than your income you won't owe any taxes.
So for Greg and I: we get a standard deduction of $11,900 and then two personal exemptions, or $3,800*2=$7,600. To owe any taxes, we would to earn more than $19,500 this year.
For a single person who is claimed as a dependent by their parents: you get the standard deduction of $5,950 but no personal exemption. You have to earn more than $5,950 this year to owe any taxes.
A single person who is not a dependent: you get the standard deduction of $5,950 and one personal exemption of $3,800. To owe any taxes, you need to earn $9,750
If you know you're not going to owe any taxes, don't give the government your money. I mean, unless you just really want to.
Taxes! *cringe* Don't worry, I'll keep it relevant and important. As boring and intimidating as the topic is, it is worth having a basic understand. After all, the only things certain in life are death and taxes! You don't need to know how to fill out your own tax return - hello, it's called Turbo Tax. But knowing and understanding some concepts can help you keep track of your money better.
You know how when you get paid, the pay stub shows the difference between what you actually made and what you are receiving? The difference is what the government has withheld from your paycheck. They withhold your money to make sure they get paid what they are owed. It's kind of nice for you too, because if they withhold enough you don't have to shell out a bunch of cash in April.
Whenever you start a job, you are asked to fill out a W-4. This form is how the government decides how much money they will take out of each paycheck you get. The W-4 has you specify how many "personal allowances" you need. This is based on if you're married, how many kids you have, etc. The theory is that when you have a spouse/kids you get a tax break and don't pay as much in taxes, therefore the government will withhold less from your paycheck. So, remember, the higher the number of allowances you take, the less money they will take out. If you don't take any allowance, BAM, they will take as much as they can.
Now, of course, if they take out too much money it gets returned to you. How many times do we get a huge tax return because they took more money from our paycheck than we actually owed? Maybe you like getting a tax return, it's kind of fun, like a little present. But remember - that money is your money. You just loaned the government your money for free. Here Washington, just hold on to my money for a few months. Nah, don't pay me any interest on it, you can just hold it, thanks! Once they withhold it from your paycheck, you can't get it back until the year ends and you file your tax return. I don't know about you guys, but I have my own uses for my money.
For a lot of us, we don't even make enough money to owe taxes, so the government shouldn't be taking anything out. How do we make sure they don't withhold anything? By marking exempt on your W-4! They will still take out your social security taxes, those are unavoidable. But you will get to keep everything rather than having to wait a year to get it back!
How do you know if you will make enough money to pay taxes? There is a hurdle you have to pass before you will owe any taxes. This hurdle comes from the deductions the government allows you to take in calculating how much you owe in taxes. The first is the standard or itemized deduction. If you want to know more about the itemized deduction, ask and I'll explain, but it doesn't apply to most of us. The amount of your standard deduction depends on if you're single or married. Check out this sweet chart:
| Filing status | |||||
|---|---|---|---|---|---|
| Year | Single | Married Filing Jointly | Married Filing Separately | Head of household | Qualifying Surviving Spouse |
| 2012 | $5,950 | $11,900 | $5,950 | $8,700 | $11,900 |
You automatically get to deduct these amounts from your income, so if your deduction and exemptions are more than your income you won't owe any taxes.
So for Greg and I: we get a standard deduction of $11,900 and then two personal exemptions, or $3,800*2=$7,600. To owe any taxes, we would to earn more than $19,500 this year.
For a single person who is claimed as a dependent by their parents: you get the standard deduction of $5,950 but no personal exemption. You have to earn more than $5,950 this year to owe any taxes.
A single person who is not a dependent: you get the standard deduction of $5,950 and one personal exemption of $3,800. To owe any taxes, you need to earn $9,750
If you know you're not going to owe any taxes, don't give the government your money. I mean, unless you just really want to.
What do I do with all this money?!
By: Megan
Once you've decided that saving money is important to you and you've committed to disciplining your spending, your money will start to accumulate. It doesn't matter how slow this process is, as long as it is happening. Shoot to save 10-20% of your income. Now that you are saving money, what should you do with it?
The first thing you should do with your savings is build up an emergency fund. The size of this fund will vary based on your life situation. Most experts recommend 3-6 months of income, but if your family involves children and a non-working spouse you might want to consider saving more. This money is only for emergencies! Emergencies include covering your living expenses if you lose your job, fixing the car, doctor's bills, etc.
Some people ask, "Shouldn't we pay down our debt first?" This is a very good question, especially since we all know how dangerous debt can be. The reason it is good to start your emergency fund before you worry about putting all your savings toward paying off debt is this: if you don't have an emergency fund and an emergency happens, how will you pay for it? With debt. By not setting aside an emergency fund, you run the very real risk of going into more debt in the case of an emergency. This amount of debt is usually going to be more than the interest you will accrue by waiting to pay off your debt.
Where should you keep your emergency fund? Traditional bank savings/checking accounts don't earn very much interest, but they are very safe and your money is easily accessible. You don't have to worry about an investment tanking and losing your money, and when you need the money you can get it very quickly. Some internet banks offer higher interest rates than Wells Fargo/BoA. Credit Unions also offer higher interest rates and better service. Make sure your bank is FDIC insured. You might want to keep some cash at home just in case you need immediate access, but keep in mind that no one is insuring the money under your mattress and it is earning zero return. Your emergency money should NOT be invested in the stock market or in long-term bonds.
The second thing you should do with the money you are making is pay off any credit card debt and consumer loans. Consumer loans are taken out to buy things such as TVs, washers and dryers, furniture, etc. While you are in debt for these items, your hard earned money is being put to use paying down interest. This isn't benefiting you at all, it isn't helping you accomplish your goals. Once you get out of debt, all of your savings will be able to go towards your goals rather than towards interest. That is a beautiful thing.
Once you are out of debt and have an emergency fund, it's time to have fun and really invest your money!
Once you've decided that saving money is important to you and you've committed to disciplining your spending, your money will start to accumulate. It doesn't matter how slow this process is, as long as it is happening. Shoot to save 10-20% of your income. Now that you are saving money, what should you do with it?
The first thing you should do with your savings is build up an emergency fund. The size of this fund will vary based on your life situation. Most experts recommend 3-6 months of income, but if your family involves children and a non-working spouse you might want to consider saving more. This money is only for emergencies! Emergencies include covering your living expenses if you lose your job, fixing the car, doctor's bills, etc.
Some people ask, "Shouldn't we pay down our debt first?" This is a very good question, especially since we all know how dangerous debt can be. The reason it is good to start your emergency fund before you worry about putting all your savings toward paying off debt is this: if you don't have an emergency fund and an emergency happens, how will you pay for it? With debt. By not setting aside an emergency fund, you run the very real risk of going into more debt in the case of an emergency. This amount of debt is usually going to be more than the interest you will accrue by waiting to pay off your debt.
Where should you keep your emergency fund? Traditional bank savings/checking accounts don't earn very much interest, but they are very safe and your money is easily accessible. You don't have to worry about an investment tanking and losing your money, and when you need the money you can get it very quickly. Some internet banks offer higher interest rates than Wells Fargo/BoA. Credit Unions also offer higher interest rates and better service. Make sure your bank is FDIC insured. You might want to keep some cash at home just in case you need immediate access, but keep in mind that no one is insuring the money under your mattress and it is earning zero return. Your emergency money should NOT be invested in the stock market or in long-term bonds.
The second thing you should do with the money you are making is pay off any credit card debt and consumer loans. Consumer loans are taken out to buy things such as TVs, washers and dryers, furniture, etc. While you are in debt for these items, your hard earned money is being put to use paying down interest. This isn't benefiting you at all, it isn't helping you accomplish your goals. Once you get out of debt, all of your savings will be able to go towards your goals rather than towards interest. That is a beautiful thing.
Once you are out of debt and have an emergency fund, it's time to have fun and really invest your money!
Monday, July 30, 2012
Budgeting
By: Megan
I honestly really struggle with the concept of budgeting, mostly because it consists of so much prediction. I never know what expenses are going to come up - sure there are the regular things like gas, groceries, rent, tuition. But how do I estimate when I'm going to run out of shampoo/need new underwear? I used to not think budgeting was necessary, but if you are serious about saving money, you really need a budget!
I think the most important part of budgeting is just tracking your expenses - what are you buying? How do you know what you can afford when you don't even know what's going on with your money? You can do this manually on a piece of paper or use an electronic service that tracks your expenses automatically. Mint.com is an example of a free website that links to your debit/credit cards to help you analyze your spending. Quicken is a (not free) software that also links to your accounts. You might even be able to use your bank website. Sometimes we don't realize how much money we're spending on things like restaurants, new clothes, vending machines, etc. When you start tracking your expenses, you get a better idea of where your money is going and where you can cut back. Are you spending so much money that you don't have anything left to put into savings? Tracking your expenses also helps you estimate future expenses.
The old way of budgeting was to save whatever portion of your income wasn't spent. My personal finance professor taught us what he called "the better way to budget." In this method, you pay the Lord first (tithing) and pay yourself second by setting aside a set amount of your income for savings. Then you allocate the remaining income to your expenses. Everyone has to start somewhere. If you're living paycheck to paycheck, find a way you can cut back on even $5-10 per paycheck. Saving to buy the things you actually want is more fulfilling that wasting your money on things you don't really care about. Getting in the habit of saving money now will help you start saving for retirement and other goals as well. Start saving now, no matter how little it is! Don't think that it's not worth it to only save a little bit. Financial freedom is more the result of decreased spending, not increased income. Make saving money a conscious effort.
Dave Ramsey has a method for budgeting where he says "give every dollar a name." In other words, whenever you receive income, sit down and break that income up into what you're going to spend it on. For example, if your paycheck was for $700, you would say $550 is for rent this month's rent, $70 is for tithing, $40 is for groceries, the rest is for savings. This method doesn't really work for me. Sometimes, our paycheck doesn't cover all the expenses we need for that two week period so we end up spending more than we made for that paycheck, but our expenses will be lower for the next two week period so it all balances out over the month. I prefer to take a big picture view of budgeting and this way feels too stifling to me. But I know several people who budget this way and have great success. I think this way is great for spenders who really need to discipline themselves or people who have a lot of regular monthly payments (rent, car payment, phone bill utilities, etc). Dave Ramsey's website has some cool forms you can use to budget: http://www.daveramsey.com/tools/budget-forms/
Another way to budget is to sit down in advance and estimate your upcoming income and expenses. You can do this weekly, every two weeks, monthly, every two months, etc. I like this way a lot better because I get to choose how often I want to make estimates. I can even estimate for the whole year to see if I will have enough many for big future expenses (such as tuition). This method still involves a lot of estimation, so it can still be tricky. I've gotten better about estimating our expenses but I'm still off by quite a bit each month. I used Quicken software for this, and I really enjoy it. If you're willing to shell out the money, Quicken runs from $50-100 based on the version you get.
This is what Quicken looks like:
Screenshot showing part of our future income and expense estimates:
Screenshot showing how we are doing this month
Next personal finance post: I've been saving money .... now what do I do with it?
I honestly really struggle with the concept of budgeting, mostly because it consists of so much prediction. I never know what expenses are going to come up - sure there are the regular things like gas, groceries, rent, tuition. But how do I estimate when I'm going to run out of shampoo/need new underwear? I used to not think budgeting was necessary, but if you are serious about saving money, you really need a budget!
I think the most important part of budgeting is just tracking your expenses - what are you buying? How do you know what you can afford when you don't even know what's going on with your money? You can do this manually on a piece of paper or use an electronic service that tracks your expenses automatically. Mint.com is an example of a free website that links to your debit/credit cards to help you analyze your spending. Quicken is a (not free) software that also links to your accounts. You might even be able to use your bank website. Sometimes we don't realize how much money we're spending on things like restaurants, new clothes, vending machines, etc. When you start tracking your expenses, you get a better idea of where your money is going and where you can cut back. Are you spending so much money that you don't have anything left to put into savings? Tracking your expenses also helps you estimate future expenses.
The old way of budgeting was to save whatever portion of your income wasn't spent. My personal finance professor taught us what he called "the better way to budget." In this method, you pay the Lord first (tithing) and pay yourself second by setting aside a set amount of your income for savings. Then you allocate the remaining income to your expenses. Everyone has to start somewhere. If you're living paycheck to paycheck, find a way you can cut back on even $5-10 per paycheck. Saving to buy the things you actually want is more fulfilling that wasting your money on things you don't really care about. Getting in the habit of saving money now will help you start saving for retirement and other goals as well. Start saving now, no matter how little it is! Don't think that it's not worth it to only save a little bit. Financial freedom is more the result of decreased spending, not increased income. Make saving money a conscious effort.
Dave Ramsey has a method for budgeting where he says "give every dollar a name." In other words, whenever you receive income, sit down and break that income up into what you're going to spend it on. For example, if your paycheck was for $700, you would say $550 is for rent this month's rent, $70 is for tithing, $40 is for groceries, the rest is for savings. This method doesn't really work for me. Sometimes, our paycheck doesn't cover all the expenses we need for that two week period so we end up spending more than we made for that paycheck, but our expenses will be lower for the next two week period so it all balances out over the month. I prefer to take a big picture view of budgeting and this way feels too stifling to me. But I know several people who budget this way and have great success. I think this way is great for spenders who really need to discipline themselves or people who have a lot of regular monthly payments (rent, car payment, phone bill utilities, etc). Dave Ramsey's website has some cool forms you can use to budget: http://www.daveramsey.com/tools/budget-forms/
Another way to budget is to sit down in advance and estimate your upcoming income and expenses. You can do this weekly, every two weeks, monthly, every two months, etc. I like this way a lot better because I get to choose how often I want to make estimates. I can even estimate for the whole year to see if I will have enough many for big future expenses (such as tuition). This method still involves a lot of estimation, so it can still be tricky. I've gotten better about estimating our expenses but I'm still off by quite a bit each month. I used Quicken software for this, and I really enjoy it. If you're willing to shell out the money, Quicken runs from $50-100 based on the version you get.
This is what Quicken looks like:
Screenshot showing part of our future income and expense estimates:
Screenshot showing how we are doing this month
Next personal finance post: I've been saving money .... now what do I do with it?
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