Saturday, February 3, 2007

The Trickle Effect

Do you often find yourself with no money at the end of the month? You think to yourself, "Where did it all go?" I'm sure we've all had times like these, or at least known someone who has. Always down on their luck, waiting to get paid. I had a friend like this back home. He had a decent job, but for some reason, never had money when the 30th was approaching. I always wondered how it felt to live like that. He wasn't poor; he had nice clothes and was quite social. But he often changed his lifestyle towards the end of the month.
I didn't know what to tell him at the time. People often take advice on money quite personally, and I think he would have done so also.
Where did it all go? Was there a hole in his pocket, disappearing money? Probably not. But if he learned how to budget or keep a budget, he would know where it went.

This is what we will discuss today. Budget basics. There are many reasons to keep a budget: awareness of how much money you have, to know where you spend the most money, to see where you can trim back, to have a sense of your finances, to have control of your finances, and to set realistic goals. All these are great reasons to create a budget. Let's make a simple budget (if you have Microsoft Excel, you can get a budget template).

Step 1: Record your monthly salary

Step 2: Creat budget categories such as: rent, bills(you can break bills down in to smaller parts such as phone, electricity, insurance, etc.), food, entertainment, transportation, savings, and misc. You can add or delete catagories as you see fit. Once you know how much of your money is going where, then you can make reasonable amendments. For example, your rent shouldn't cost you half your income or your entertainment allotment shouldn't be more than a basic such as food. Here is a breakdown in percentages, of where your money should be going.

Let's say you make US$4000/month:
Savings: at least 10%, preferrably 20-30+% (US$400-1200)
Rent: less than 30% (US$1200)
Food: about 15% (US$600)
Entertainment: about 5% (US$200)
Bills: about 10-15% (US$400)
Transportation: ~15% (US$600)
Debt: 5% (US$ 200)
Misc.: 10% (US$400)

The reason I place savings first is because you should pay yourself first.

This is a simple thing that once created, will become easier, save you time, and allow you to keep track of your finances. then you can alter it if need be. But you will always know where your cash is going. If you are really interested in creating a useful budget, you can purchase software created just for this such as Quicken or MS Money.

Don't you think they should teach this is high school? Basic economics, instead of trigonometry. I don't mean to deny trig its importance in life, but I think personal finance is more applicable to more lives than learning about angles. I took trig. in high school but didn't remember much, so I looked up the definition:

trig·o·nom·e·try - the branch of mathematics that deals with the relations between the sides and angles of plane or spherical triangles, and the calculations based on them.

WTF!?Maybe if you plan to be a mathmatician, physisist, or math teacher this is useful stuff. But for most people learning how to make a budget is much more useful. It directly applies to their life.

Think about it...

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