The B Word, Part 1

Dear readers, you should now sufficiently know that you can (and should) start a budget. Typically, the first budget suggestion/commandment is “Spend less than you earn.” It’s good advice, but occasionally it’s mathematically impossible. If you are a full time college student paying for school with student loans, then you likely are “spending more than you earn” at this point in time. This idea also applies if you have just opened or expanded a business via a business loan. (Hint: The end goal in both cases is to earn more in the future to pay off the loan and make it worthwhile.)

The word budget comes from an old French word for bag of money, so mentally picture a cartoonish bank sack with a giant dollar sign on the side. To make this sack into a budget, it requires money—picture two giant cartoonish arrows, one pointing into the sack and one pointing out of the sack. Poof, the sack is now a budget. In your current predicament, the arrow pointing into the sack (your income) is small, while the arrow pointing out of the sack (your expenses/outflow) is larger. We’ll talk about how to grow the currently tiny income arrow in a future column. For now, we’ll focus on shrinking the outflow arrow.

To determine how big your outflow arrow is, you first need to know how much you spend. Unfortunately, this requires you to track your spending. Fortunately, tracking your spending can be accomplished in a variety of ways. You might put all purchases on your credit card, and then check your statement every month. (Huge tip: pay off your credit card every month. A bank should pay you to use their product; you should not pay them.) If you don’t use a credit card, or at least not for every purchase, you might keep a copy of all receipts for a month, and sort them into piles like “food” and “transportation.” Other people use only cash they sort out at the beginning of the month (e.g. $150 for food) so when it runs out, they have to wait until the next month. (This cash strategy is often called the envelope method, and can be difficult to implement if you’re not already aware of your rough monthly spending.)

In our household, we plan a monthly budget, predicting what we’ll spend in various categories and writing the predictions on a series of envelopes. For example, this month the “transportation” envelope states we aim to spend $100 on transportation. Then, each day we make a purchase, we write the amount on the envelope and put the receipt inside (e.g. $12, flat tire, August 10). Sometimes we exceed the prediction, but it gives us a goal, which is preferable to reckless spending. In the end, we know how much (or how little) money we have left in our money sack. So here’s your assignment: start tracking your spending. You might be surprised where the outflow arrow leads.

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