Budgeting for Beginners: Budgeting for Beginners, #1

INTRODUCTION

This book is meant to help you get a handle on your personal finances. It’s for beginners who’ve never really had to sit down before and think these things through.

When I wrote the book I asked myself how I approach these things. What information do I need? How do I assess that information? And what do I do once I know where I stand?

Those questions are what are behind the three main sections of this book.

In the first section of the book we’re going to walk through how to determine what you earn, what you spend, what you own, and what you owe. That’s the information you need to start managing your money better and work towards your financial goals. If you don’t know where you are, you can’t get to where you need to go.

In that section I also spend time talking about how to judge these things if your income is not steady and predictable or not paid out monthly. So if you’re self-employed, a student whose main income comes from lump-sum payments, your income is commission-based, or your hours are unpredictable. We’ll walk through how to determine what you earn when you’re in a situation like that.

We’ll also discuss in some detail the difference between what something is worth on paper and what it’s really worth when you need it. (A very important distinction for some of us.)

Next we’ll move into the second section of the book where we talk about what to do with those numbers. How do you compare them to one another? When do you know that you’re on track and when should you start to worry?

Finally, in the third section we’ll walk through strategies for improving now that you know where you stand and where your weaknesses might be.

In an ideal world we’d all be debt-free, maxing out our 401(k), and with a six-month cash reserve. But that’s not most people’s reality. Most people are barely stumbling from paycheck to paycheck. This book is meant to help you get a handle on things so that you’re not stumbling along, so that you have a direction and a way to improve your situation.

Now, a quick word of caution before we start: This book involves math. Not complex math. We’re not going to do any calculus. But you are going to need to do some addition, subtraction, multiplication, and division. There’s no way around it. I’ll walk you through everything you need to know, so just stick with me and you’ll be fine. But I wanted to warn you up front.

(And if you’re shaky on basic math, that’s fine. That’s life. But you should probably brush up on your math before you start this book. There’s no way to implement what we’re going to talk about here without being able to do addition, subtraction, multiplication, and division. I did write a companion guide for the first version of this book, Juggling Your Finances: Basic Math Primer, that covers that, but there are plenty of free resources out there as well.)

Also, for those of you who learn better listening than reading, the basic content covered in this book is available in audio as The Juggling Your Finances Starter Kit.

Okay then. Let’s get started.

PART I

GETTING STARTED: EARN SPEND OWN OWE

WHAT DO YOU EARN

The first thing you need to know if you're going to get a handle on your finances is what you earn. In other words, what cash do you have coming in that you can use to pay your bills?

That requires that you choose a timeframe for tracking this information.

I tend to do all my budgeting on a monthly basis. Most of my bills, like rent, utilities, phone, internet, and credit card, are billed on a monthly basis, so it makes sense to me to also track my income on a monthly basis so I can match the two together.

Most people get paid more than once a month, but since expenses are often monthly I think tracking income monthly makes the most sense. It lets you compare apples to apples, so to speak.

From here on out we're going to talk about tracking income (what you earn) and expenses (what you pay) on a monthly basis. But if it makes more sense for you to use a different time period, then do so. The same principles apply no matter the time period involved.

Your goal is to know what you bring in for a specific time period and compare that to what you have to pay out for the same time period.

So, what do you earn in a month?

Salaried Jobs

For those with steady salaried jobs, this is pretty easy to calculate.

Look at the automatic deposits or paystubs from your employer for the last month and add them up. If you get paid $563.42 every two weeks, then your monthly income is $1,126.84.

Note that the number that matters here is NOT what your gross pay is. (That's the amount you're paid before they take out taxes.) What we care about is your net pay. (What you actually take home.)

In other words, it doesn't matter if you earn $24,000 a year. What matters is that you actually take home $18,480 a year.

(Note that I made those numbers up. The percentage of your gross income that you take home will depend on your income and what you have to pay in taxes. In the U.S. that's related to how many deductions you claim when you fill out your tax form. Two people can earn the exact same amount on a gross basis and be paid very different amounts depending upon their deductions. So, use your actual numbers for this.)

Why do we care about net pay instead of gross pay?

Because that’s the money you can actually spend each month.

Now, one quick comment here and then we'll move on to the more tricky situations.

I used to work for an employer that paid every two weeks. I think it was every other