The Basics of Banking: Part 2

Budgeting. For many people, just saying the word is stressful. How do you create a budget, let alone follow one? 

Budgeting can be especially difficult for young people whose monthly incomes often fluctuate, but knowing how budgets work is critical for developing healthy financial habits.

Budgeting 101

Budgeting is not about constantly saying “no” every time you want to buy something. Ultimately, it's about understanding your finances by tracking your spending, setting savings goals, and achieving them. Your budget ensures you always have enough funds on hand for the things you need while setting aside a little extra for the things you want. Following a budget not only helps you stay out of debt in the first place, it can also help you pay down existing debt.

Creating a budget

There are numerous ways to create a basic budget, but the best advice is to begin by taking stock of the money you have. List all the savings you might have in a bank account or saved from birthdays, holidays, or other special occasions. Additionally, list any regular income from an allowance or after-school jobs.

Next, list all your expenses, meaning everything you buy each month. Include food, entertainment, clothes, school supplies, club dues, and any bills you’re responsible for paying. Total the items on each list. This will give you an idea of how much money you have coming in and going out.

Now go back to the list of expenses and prioritize them. Which items must be paid for each month, and which are optional (such as shopping or dining out)? Subtract the required items from your income to see how much is left over.

This number helps determine how much money you have to spend on fun activities. It also helps when deciding how much you want to put aside in savings each month.

Sticking to your budget

Once you’ve established your budget, it’s important to stick with it. This can be as simple as keeping a list of income and expenses in a notebook or on your phone, or creating a basic spreadsheet. Spend a few minutes each month updating your income, spending, and savings so you can stay on track. 

Building healthy financial habits

It’s never too early to build good money management skills. With a solid foundation, kids and young adults can develop the knowledge and habits that help them become independent adults and avoid common financial mistakes.

In our next Basics of Banking installment, we’ll discuss opening your own checking and savings accounts.