I wrote an overview of Financial Literacy in my blog from the beginning of the year. For those of us who find explanations easier to understand when clarified by pictures, the Infographic Guide to Personal Finance is a visual reference available from the library.
My earlier blog included a link to useful guidance on how to create a budget in order to start saving money. I strongly encourage anyone to follow the commonsense advice described in this article, which lists types of expenses to remember to include in a budget, and suggests how to use a budget to help decide where to find savings. For those who are willing to use apps, Mint is a free online service to help track bills and budgets. There are many others (look for reviews online) some free, some with monthly charges.
I enjoy working with numbers, and I tend to analyze anything and everything, so it is natural for me to budget. However, it is easy to understand how people less inclined to analysis would be reluctant to create a budget. The Debt-Free Spending Plan attempts to help those of us who have trouble with debt or spending more than we earn, without resorting to budgeting. The plan involves stopping using credit cards and taking a few minutes once a month (before spending any money that month!) to write down one’s expected income, bills, and cost of daily needs. If income is higher, the difference can be used for saving or spending that keeps one from feeling deprived; if expenses are higher, daily needs must be cut to be more in line with income. Tracking expenses in a notebook helps keep one aware of the plan. Soon, it should be possible to pay for emergencies from savings instead of depending on credit.
It is not difficult to find books explaining how to use budgets (such as You Need a Budget). However, it can be difficult to follow advice on how to follow a budget! Most people have trouble sticking to any well-intentioned resolution. For some, it might be easier – rather than even trying to stick to a budget or spending plan – to start with goals. A goal might be to build an emergency fund, or save for a car, or save for a vacation, or simply to set aside money for having fun. It is always helpful to be aware of your income and how much you are spending, so that your goal is reasonable! Paying attention to numbers is important, even if this involves nothing more than entering the numbers in an app which will organize and perform calculations for you.
After setting a goal, create a separate account where funds for the goal will be deposited, then automate the transfer of funds to that account. Your employer or your financial institution should be able to automatically transfer a fixed amount each month (or whatever time period makes sense) to this account, with no additional decision on your part. Over time, there will be enough money in the account to fund the goal. However, keep in mind that funding a separate account is no help at all if you continue to spend just as much on other expenses by building up credit card debt!
You may create a budget, a spending plan, or a goal. You may need money to reduce debt, to start saving, or to set some aside for something nice. In any case, that money — however little — should be a routine priority, not an afterthought. Small purchases add up quickly, but knowing how much money remains from income after paying expenses and funding that priority helps you know how much to spend on a whim without feeling guilty!