Budgeting Basics: Spending Less than You Earn

Learning how to budget is a key way to avoid being saddled with debt, and allows you to be more in control of your finances. High school student Nicholas Bakke is using his budgeting skills these days to save up for an iPad. Purchase the items you want, says Bakke, but only after you can afford them. What’s your goal?Read More

by Leah Genuario

Any good discussion on budgeting starts with a discussion about debt, a term simply defined as something owed.

Recent statistics in the U.S., for example, point to a debt-laden America. While some of this debt is strategic, such as a mortgage or college loans, increasingly, individuals spend beyond their ability to pay back. NerdWallet’s 2017 American Household Credit Card Debt Study shows that credit card debt continued to climb in 2017, increasing 8% over the previous year to $905 billion. The report points out that “several major spending categories have outpaced income growth over the past decade; many Americans are putting medical expenses on credit cards; and the average indebted household is paying hundreds of dollars in credit card interest each year.” It is part of the reason why more than a million people file for bankruptcy each year, a legal proceeding that relieves debt but comes with consequences such as difficulty in borrowing money for a home.

Learning how to budget is a key way to avoid being saddled with debt, and allows you to be more in control of your finances. A budget is a tool “used to assess one’s financial situation,” says Doug Young, director of the HSBC National Center for Economic and Financial Education at the Council for Economic Education, a nonprofit organization focusing on student economic and financial education. “Budgeting is important to get finances straight, to get people out of debt and to get them to a place where they feel financially capable to save.”

Finding ‘Money within Your Money’

David Bakke, editor of Money Crashers Personal Finance, an online resource dedicated to personal finance, puts it this way: “The ultimate goal of a budget is to spend less money than you earn.”

There are several ways to create a budgeting system, though general principles remain the same. At its most basic level, a budget starts with a record of money earned, versus a record of money spent. If this exercise reveals that more money is spent than earned, conscientious individuals must find ways to reverse the trend.

Budgeting can make the process of adjusting expenses and earnings easier. An advantage of budgeting is its ability to “help you find money within your money,” notes Young. He says that an assessment of personal finances will help reveal where adjustments need to be made. For example, if a person’s expenses are too high, an evaluation of expenses may reveal that an overly large percentage of money is going toward entertainment on the weekends. This may be a good area to cut back.

Once you have an understanding of expenses and expenditures, and you have made adjustments to stay within your financial means, you can devise a system to stay within your budget. Young suggests two popular methods: the envelope system, where each envelope represents a spending category and money is appropriated into the envelopes each month; or the notebook system, where expenses are recorded according to category. Any excess at the end of the month can be saved or put toward a future purchase.

In the case where spending categories are few, such as with a teenager living at home, Bakke offers a simplified version. “Keep your budget simple and to the point — one sheet of paper with income on one side and spending on the other will do,” he says.

It is never too early to set your budget. Bakke suggests that students should start a budget if they receive a significant allowance or earn money on their own. It is something his son, Nicholas, a high school student at Pinecrest Academy near Atlanta, Ga., has already done for several years.

Nicholas runs a landscaping business and has created a simple budget based on his father’s suggestions. “Every time I complete a job and get paid, that money is listed in the income category. Every time I spend money, I enter that into the expenses category. If I have a major purchase that I am saving up for — right now it’s for an iPad — I notate that on my budget so I know where I’m at as far as saving for that item.”

Fighting Frugal Fatigue

The teen’s budgeting system has already paid dividends. Before his iPad goal, Nicholas set his eyes on saving for a Nintendo DS, noting in his budget that a used system would cost $70. “Each month, I kept track of my income and spending and always made sure I had extra leftover to earmark for my Nintendo DS. After three months, I finally had enough money to afford it,” he adds.

Sometimes staying on a budget requires a longer wait than desired. “We are used to having what we want, and it’s hard to stay on a budget because it limits you,” says Young. He says that sometimes “frugal fatigue” sets in, where people touch money they shouldn’t to satisfy a want versus a need.

However, given the steep consequences that can come with obtaining too much debt — consequences that can include loss of property, missed job opportunities and inability to get future loans — a little self-control is worth it.

Nicholas says his parents have forbidden him to own a credit card until he’s 18, but he adds, “I’m cool with that. I have a debit card, and as I get more accustomed to using it, I understand more and more the dangers of credit card debt,” he says. “My advice for fellow teens out there is this: look for ways to generate income early in life, and save as much as you can. Purchase the items that you want, but only after you can afford them.”

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20 comments on “Budgeting Basics: Spending Less than You Earn

  1. Some key budgeting strategies include the noting down and recording of income, categorizing expenses, evaluating of expenses, and making adjustments as necessary in order to utilize money properly and efficiently without overspending in one category or the other. It all comes down to making wise decisions with your money by staying in control; not allowing it to be the other way around.

  2. It’s important to budget your money for emergencies, there can be unexpected things that may come out of nowhere and having money saved to pay for those things can help

  3. it is important to budget your money to know if you’re above or just around the right amount you need to spend.
    Key strategies of budgeting is also knowing if the item or service is actually needed.
    Secondly calculating the total amount of what it will come out to.

  4. A key strategy can be as simple as making a list of the things you want and the things you need for a month and calculating prices. It’s important to budget because you can save up and pay for things like loans or even a new car. Budgeting in general can help keep you out of debt and in a good place financially.

  5. Budgeting is very important. Having a financial plan can help us to avoid from obtaining too much debt. Debt can cause serious problems and stress. Budgeting also help us to save money.

  6. Budgeting allows you to plan for both short-term and long-term expenses by ensuring that you aren’t spending more than you are earning. It’s a simple, practical approach for people with different kinds of expenses and income to manage their money.

  7. Simply listing the things you want and the things you need for a month and calculating prices can be a key strategy. The reason you should budget is because you can save up and buy things like a new car or a loan. A budget can help you stay out of debt and keep your finances in order.

  8. Some budgeting cheat codes are writing your necessities for the month and to calculate how much that cost. Then try to save the rest instead of spending a lot of money and food or items.

  9. It’s important to budget, so you can live within our means. Spending more money over your income amount could lead to you being in debt for the future. It’s good to have planned spending habits like within a budget versus no budget.

  10. I say it’s very important to budget money, that way you watch how much you spend and still can have a decent amount left over instead of going all out

  11. It is very important to budget, in fact have a spread sheet to outline your spending and earning to keep your spending in check. We budget to make sure that your savings are on track for the future. Budgeting can help you set long-term financial goals, keep you from overspending.

  12. Consumption is endless and requires living within one’s means; Otherwise, the brief desire for consumption would be satisfied, but one would not be able to make ends meet and be in high debt.

  13. It’s important to budget your money because it helps you track your expenses and its a good way of making a smart choice and its managing your lifestyle. Some key budgeting strategies are setting financial goals and prioritizing your needs or wants.Frugal fatigue is the feeling of exhaustion and stress.You should fight it because it can lead to impulsive spending which is not managing your money.

  14. It is important to budget your money because that ensures that you have enough money for you needs and to support your family if necessary. After that comes all the unnecessary spending (wants) and in case of emergencies, you will have money saved up.

  15. Endless consumption necessitates living within one’s financial limits. Failing to do so may satisfy immediate desires but could lead to an inability to meet essential expenses and accumulate substantial debt in the long run.

  16. It is important to administrate your income because you’re able to control your finances. Track your income and expenses and limit your spending and save for your goals and be able to achieve long-term financial stability. By creating a realistic budget the 50/30/20 rule spending 50% of your income on your needs and 30% on your wants and the rest 20% should go towards your savings. Frugal fatigue means to a feeling of exhaustion that can occur from constantly focused on saving money being able to balance and being able to occasional treating your self and once in a while self care. Managing your finances that promotes both financial well-being and overall happiness.

  17. I would say that it is important to budget in order to be on top of your spending and controlling not only how much you are spending but also how much you want to save which can be helpful in financial emergencies and in general is a great finical skill that shows discipline.

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