It can be difficult to keep an eye on your spending during the month.  Overdraft charges can easily occur right after payday, and sometimes money intended for savings is spent.  These types of financial hiccups are easily prevented by using solid money management methods.  Creating a budget is the first step towards better money management.

A 2013 Gallup poll showed that two-thirds of Americans¹ do not track their monthly income or expenses; according to Bankrate, this can be attributed to many Americans lacking money management skills.²

“People write out budgets all the time without knowing where their money is really going,” said Jim Tehan, a spokesman for Myvesta Foundation, to Bankrate. “What they’ve created is a wish list of how they’d like to spend their money, but it’s not realistic. It’s a page of lies.”

So how can you avoid creating a wish list, and instead develop a useful budget? First, figure out your net worth, and then track your spending.

What is your net worth?

The first thing to do, according to Money Crashers, is to start working on a budget.³ To begin, calculate a few numbers for a realistic budget.

Start with how much there is in your bank accounts, including checking, savings, and any other source your finances are pulled from. From there, figure out your monthly income. This is simple if you’re a salaried employee with a consistent paycheck. If your pay changes cycle to cycle, because you’re a part-time or hourly worker, calculate the average amount earned per month over the most recent 6-12 month period.

Your monthly take home pay and your current bank account totals equals your current assets.

Once your assets are calculated, you can start working on the other side of the equation: calculating your monthly debt. To do this, begin with any loans you’ve accrued.  This could include your mortgage, student loan debt, or monthly car loan payments.

When you subtract monthly debt from your assets, you know your net worth. Don’t be alarmed if your net worth is low. According to a 2014 Marketplace report, most Americans have zero net worth,⁴ which means their assets are equal to their debt.

How do I track my spending?

To keep watch over where money goes during the month, it’s best to understand what needs to be paid month to month. Household expenses are the most common source of monthly spending.

Among them are utility bills, and regular car maintenance fees. It helps to separate them by category and determine average monthly payments for each, for example: car maintenance, household utilities, and groceries. Category types can be anything, but what’s important is that they work for you. Tracking spending also requires monitoring how much is actually put toward those categories, whether it’s above average, below it, or right on.

The best way to find a budget that works is by tracking your spending for at least a month. It seems simple, but if that were the case more Americans would have their budgets ready to go. However, by using apps, much of the work can be automated.

According to PC Mag, Mint.com’s money management app is the best personal finance software and was awarded editor’s choice⁵ in November 2015. It’s a free software that connects with your bank accounts to track transaction history.

By tracking your spending each month, you know where your money is going and exactly how much.  This is the first step towards developing a solid budget.  After this, you can even go further and begin to scale back expenses to save extra money for emergencies.

The views expressed by the articles and sites linked in this post do not necessarily reflect the opinions and policies of Cash Central or Community Choice Financial®. 

Sources:

¹Jacobe, Dennis. (2013, Jun 3). Retrieved from: https://news.gallup.com/poll/162872/one-three-americans-prepare-detailed-household-budget.aspx

²Goldberg, Matthew. (2022, Sept 27). Retrieved from: https://www.bankrate.com/banking/savings/ways-to-save-money-on-a-tight-budget/

³Davis, Brian. (2021, Mar 1). Retrieved from: https://www.moneycrashers.com/how-to-make-a-budget/

⁴King, Noel. (2014, Apr 21). Retrieved from: https://www.marketplace.org/2014/04/21/wealth-poverty/about-half-america-has-zero-net-wealth/

⁵Yakal, Kathy. (2022, Sept 7). Retrieved from: https://www.pcmag.com/reviews/mintcom