Part of being financially responsible is spending your money wisely. If you’re smart you’ll save what you can when you’re young and only spend what you need. Of course, sometimes it takes experience to know what you really need. If you’re in high school you may claim you need a social life which leads you to spend your money. If that’s the case, you’ll need to be careful about the years ahead. If you’re reading this and you’re a soon to be college graduate, pay close attention. Budgeting will be a necessity when you start out. Budgeting when you look at it, really is a habit. Since you were little, your parents developed in you the habit of brushing your teeth twice daily. Well, all you need to do is develop the habit of developing a budget. When you start the process of making a budget, there are some things you can list to get an idea of where your money is going.
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- Income: Money coming in, such as the money earned from a job.
- Expenses: Money going out
- Fixed Expenses: This is money you pay monthly that doesn’t change. Examples of this are: cell phone bill, rent, car payments, and insurance.
- Variable Expenses: Money you spend on various goods or services which can vary from item to item. This may include entertainment, recreation, and clothing. Write down anything which may seem inconsequential, it will help give an idea of how much you’re spending.
Needs Vs. Wants
This is where things get hard, especially for some of you teenagers out there. You need those new shoes right?? You need the latest iPhone, all of your friends have one! Don’t fall into the trap that is succumbing to your wants, learn to say no to yourself. It is important to establish what a need and a want is.
- Needs: Items we cannot life without such as food, shelter, clothing, utilities, insurance and other utilities.
- Wants: Item we would like to have, but can certainly live without. This may include jewelry, toys, movies, cosmetics, furniture, cars, computers, etc.
Of course, there are some blurry lines, if you rely on a computer for work and the one you have breaks, then it becomes a need. If you already have a functioning computer then you don’t necessarily need another. Everyone has different needs and wants dependent on their lifestyle, all you need to worry about is establishing what your own personal needs and wants are. Wants should be purchased when you have the financial means to do so. A helpful thing to ensure you focus on purchasing needs, click the button on the left for a series of questions you can pose to yourself as you shop. Click the button on the right to see a segment from CNBC's "Can I Afford It?" when it comes to certain material goods.
Once you have established your Fixed and Variable Expenses, as well as your Needs and Wants, it’s time to look at the money you have. If you are earning money and receiving a paycheck, there are two themes you should be aware of, your Gross Income (Gross Pay) and your Net Income (Net Pay). Your Gross Income is the total money you earn, before various deductions are made. Your Net Income is the money you actually take away with you after deductions are made. Head to the next module “Understanding Your Paycheck” for more information on this subject. The combination of this money going in and out is known as cash flow.