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Budgeting 101: Creating a budget

For someone my age, I’m really lucky – I have a lot of extra cash because of the jobs that I’ve had. However, one thing that I haven’t been using is a budget. With no budget, it’s really easy to go out and spend money…but what do you say when the credit card bill comes at the end of the month? I think you know: “Where did I spend my money?!”

As many Lending Club members may know, creating a budget is no easy task. However, with help from my brother, I’m on my way to having a solid one. Here are the tips that have helped me the most.

1. Know how you spend your moneyAs was mentioned in an earlier post, you need to know how you are spending your money before you can create a decent budget. The most obvious way to do this is to track your spending for a month. Wells Fargo has a cool “Spending Reports” widget that tracks all of my credit and debit card purchases, so this work is already done for me.

You can dump receipts into a spreadsheet, a text document or Quicken–it doesn’t matter, as long as you are keeping notes on your spending. Note: cash withdrawals are very easy to forget about when you are making a budget. That $10 pizza you bought counts!

2. Know your savings goals – Write down your goals so that you will remember why you are saving. For me, my major saving goals were (in order):

    1) Save money for school
    2) Max out my Roth IRA
    3) Save an extra couple thousand dollars for my quarter abroad in Italy

I wrote down the dollar amounts I wanted to save for each of these areas.

3. Make spending goals – Look at your spending categories. First, make a list of all your living expenses: rent, groceries, gas, etc. You absolutely MUST have this amount of money. (I recommend you make this amount 10% more than you actually need, just to have a safety buffer.)

Now, make a list of other categories. I’m making a category for eating out, one for entertainment, and one for extra guilt-free do-whatever money.

4. Follow the budget! – Now you’ve basically created a budget! When you get your paycheck, make sure that you follow your system. I do something like this:

    1) Pay for my living expenses
    2) Put in my savings (including investments and meeting my savings goals)
    3) Make individual accounts for each of my spending goals.

My brother taught me an ingenious way to follow a budget—the envelope system. Put all of your money for each category into an envelope specifically marked for that purpose (I’m marking the envelopes with this cool Brother PT-80 labeler — worth its weight in gold).

Then, when you go out to a movie, grab the cash from your entertainment envelope. When the envelope is empty, you are done with entertainment purchases for the month. You can also decide to take money out of one envelope if another becomes empty, depending on your ability to resist temptation.

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