Taxes and inflation are only two of the many ways you will spend your money. Taxes are essential for maintaining many public services (such as that bus or subway you just took). And inflation can sometimes be unavoidable as the economy changes.
What you can do, however, is plan for these expenses so that you are prepared to deal with them without losing your wealth.
How do you do that? Two words: budgeting and planning. Both are key to developing healthy financial habits (and ensuring that the inflated cost of groceries doesn’t drain your wealth).
Budgeting and spending plans go hand in hand — you really can’t do one without the other. So, let’s go over in greater detail what a budget is and how you can draft a spending and saving plan.
Why Is Budgeting So Important?
A budget is a document (and can be just a piece of paper in your favorite journal) that lists all your income and expenses for a particular period.
You can start with weekly or monthly budgets. And these are just a guide to help you track where your money comes from and where it’s going.
You might think, I can do that in my head. At this age, you may not even have that many expenses or sources of income. So, what’s the point of writing it down?
A written record helps you manage and review your spending at a moment’s notice. Then, you can use it to make major decisions in the future, such as if you should get those Nike Limited Edition Sneakers (or if you can even afford them right now). Creating a budget helps you:
Set and Follow Financial Goals
You might think you don’t have any major financial goals to manage yet. However, budgeting for even smaller ones can help you manage your money better.
Perhaps your goal is to save a specific amount by the end of the month, or you want to save up for your first-ever car.
Budgeting now will help you manage your income and control your expenses so that you have enough money to make your purchase or a down payment.
But just thinking you need X amount of money isn’t enough. When you make a budget, you can check it weekly to ensure you’re following it.
It’s hard to reel in our spending habits at first (especially when everything in the store window looks so tempting). This handy piece of paper is also meant to motivate you to stick to your goal.
Become Financially Stable
What does it mean to be financially stable? It’s really just about having enough money to afford all your expenses. I’m not talking about unnecessary spending here (such as brand-name clothing), although that is a part of it.
It’s more about being able to meet the necessary expenses — food and basic clothing — and still have money left over. It’s like building a basic skill level to beat the lower levels before you fight your final opponent.
When you budget, you allot your income based on how important an expense is. A budget also shows you what you have left over at the end so that you don’t spend money you don’t have.
You want to get to a place where you don’t have to worry about meeting expenses.
Be Prepared for an Emergency
What happens if your favorite (and rather expensive) pair of sneakers suddenly falls apart, or something more serious happens (like an injury), and you end up at the hospital?
You suddenly have an expense you didn’t plan for, and now you may not have enough money to cover it unless you have something saved.
Budgeting prepares you for emergencies like this. You set aside an emergency fund — and voila! You’re ready for anything life throws your way.
You might think this isn’t relevant to you if you’re not earning yet. But an income can mean anything — even the allowance you get from your parents.
Budgeting can help you achieve simple financial goals and help you plan for bigger ones down the road. Plus, it’s a great, responsible habit to develop!
Budgeting Best Practices
There is no one way to budget. But there is a right way to budget to get the most out of it. After all, if a thing is worth doing, it’s worth doing well.
These best practices allow you to get the most out of your budget — without ever leaving you in a position where you have to worry about money or where the next payment is coming from.
Some of the practices you should adopt when budgeting include:
- Define your goal: Why you’re budgeting is important because it helps you work toward a goal. And this can be anything from buying a car to planning a vacation. Just be clear on what you want.
- Separate long-term and short-term goals: You don’t have to set a single goal for yourself. You might even move on to other goals once one is achieved. Make room in your budget for your short-term goals (like buying that cute dress). Keep them separate from your long-term goals (like planning a tropical vacation).
- Watch your spending: You must know how much you spend to make an effective budget. Pulling numbers out of the air won’t do. The ideal way is to watch your spending for about a month to get an exact idea of your spending habits.
- Separate your fixed and variable costs: Your fixed costs are those you must pay regularly (like gas for your car). Variable expenses (like eating out) happen occasionally. Prioritizing your fixed expenses makes sense — imagine you eat out one night and don’t have enough left over for gas the next day!
Making a budget — and sticking to it — is all about how you manage your spending. You can’t change how much money you make in the short term, but you can control what you do with it.
Studies even show that people who stick to their budgets can manage their spending much better than those who only follow them loosely (Kan et al., 2018, p301).
Pay Yourself First
The Pay Yourself First concept is popular within financial and money management circles. It’s a great approach to budgeting, and you’ll find out why it refers to paying yourself in just a minute.
How you budget can affect what goals you can achieve with it.
For example, if you only budget for one short-term goal (like the dress from the above example), your budget is only effective until you get that dress. Beyond that, it won’t be of much use.
When you budget for the long term, however, you think of goals reaching beyond a few weeks or months. Now, you’re thinking far into the future. And as weird as it might seem to do that right now, now is the best time to plan for your future. Paying yourself first is part of that long-term planning.
This strategy talks about setting aside your savings before you pay other expenses. You could save $20 of your $100 monthly allowance before you pay off any expenses. And if you had utilities to pay, for example, you would do that after you’d put money aside for saving.
What’s the point of this? This saving is an investment in your future.
If you pay off your costs and expenses first, you might not have much or anything left to save. That means you’re good in the short run since all your expenses are paid, and you’re not in any debt.
However, you don’t have anything set aside for the future. What if the time comes when you need to dip into your savings — and you don’t have any?
The concept behind paying yourself first is to set aside money to save. That’s Step One. When you budget, you make room for your expenses from the income left over after your savings.
Let’s say you have $100 of income every month. Of this, $20 goes into your savings every month without fail. That is something you can’t compromise on. The remaining $80 is your budget for food, clothes, commuting, and other expenses.
This budget is how you will secure your future. It ensures you will save rather than leave that as optional if you have money left over at the end of the month.
By paying yourself first, you will have to save up no matter what. And believe me, your future self will thank you for this.
How to Make a Budget
Now let’s get down to business. I’ve given you so much information about budgets that you’re likely starting to wonder what they actually look like.
We’ll explore what you need to include in your budget, how to plan a budget, and how to implement one once you’ve set it up.
For your convenience (and because you probably have few incomes and expenses at your age), I will keep it simple.
Before you start, set your goals. It’s okay to have short-term goals in mind, but focus on some long-term ones, too. Here are the things you need to put in your budget:
- All the regular income you expect in the month you are budgeting for. Do not spend money you’re not sure you will have during that month.
- All your expenses for the month, starting with fixed expenses and then including variable spending
- Tracking your spending habits. It’s good to know how much you already spend. That way, you know what habits need to change and where to cut back to stay within your budget.
- Set aside an amount to save. Remember — pay yourself first!
- Allocate your expenses to your income. Again, don’t count any income you’re not 100% sure you will receive.
- Review your budget regularly to ensure you’re following it. If you overspend in one area, you might have to adjust your budget by reducing your spending in another one to make up for it.
Income you are unsure of receiving is income you might end up not getting. If you allocate expenses to that income, you will have overspent on your budget since you spent money you didn’t have.
If your birthday is approaching and you expect to receive money from relatives, that’s great! But that doesn’t mean your birthday card will come with money.
Here’s a sample budget to help plan yours. The numbers are only meant to give you an idea of how you might make your budget. They do not reflect actual costs or expenses.
In this example, you can save money right at the outset and still have some money left over after budgeting to spend on whatever you like. Without budgeting, you would be spending more than you have.
We’ve been talking about saving a lot, but why bother? If you can budget for your expenses and ensure you don’t end up in debt over them, why bother saving at all?
Why Is a Saving Plan So Important?
You need to save because that’s how you meet your future goals. Without savings, you will have enough to meet your daily expenses, but you won’t be able to buy that chic, expensive dress you’ve had your eye on because there’s no room in your budget.
A budget can help you allocate an amount to save, but creating a separate saving plan can help you fulfill that goal.
So, what else can you do with your savings?
Plan for the Long Haul
A dedicated savings plan helps you think beyond the next week (or even the next month). You can think about that car you’ve been planning to buy or that college you want to attend after high school.
Those are excellent goals, but you won’t get there with hardly $5 to spare at the end of every month.
With a long-term goal, you can determine how much you need to save every week or month to afford that down payment or deposit when the time comes.
Take Risks
If you’re barely living within your means, there isn’t much room left in your budget for anything else. Every purchase you make would have to be planned. And if you don’t follow that plan, you will end up borrowing from your parents or friends.
With a good amount of savings set aside, you can splurge now and then, whether it’s some new shoes or go to the concert you love so much.
Financial Freedom
What does never worrying about money feel like? I can tell you firsthand that it feels great! A savings plan eliminates the stress of the what-ifs (e.g., What if there is an emergency and I don’t have enough money?) or even from splurging now and then (if now and then doesn’t become every day).
You get to plan how you can put your money to good use (beyond buying clothes and food), and you won’t have to depend completely on your parents.
Who knows what great things you might obtain or achieve with that financial independence?
Reduce Stress
Do you find it hard to live within a budget? Always needing to watch what you’re spending (and on what) can be stressful.
But what’s worse is when you accidentally exceed your budget because then you have to figure out how to decrease your spending.
Having your savings to fall back on eliminates that stress. If you don’t make it a habit, you can always rely on your savings to back you up if you overspend.
In theory, it sounds great. But is it really so easy in practice?
Why Is Saving So Difficult?
While many teens and young people want to save and know the importance of budgeting, research shows that up to 87% of teens struggle to manage their money (Tuggle, 2016).
Wants vs. Needs
Many of us struggle to balance our wants and needs. Our needs consist of what we cannot live without — and you might feel that one of those things would be attending Taylor Swift’s concert, but it’s not.
Your needs include clothes, food, and shelter — the basic survival package. Your wants are the things you would like to have, like attending that concert.
At a young age, many of us struggle to prioritize our needs over our wants. The result is that we overspend on our wants and have little to nothing left over for our needs.
Impulse Buying
You know when you go to the mall just to window shop, and you see that chic dress, sleek shoes, or stylish bag you just have to have? And then you think one purchase won’t harm anyone?
Those kinds of purchases tend to add up, and they do harm you. Not only would purchasing that item go against your budget, but if you continue to spend like that, you won’t have much savings left over.
Avoiding such purchases is about controlling your impulses. That beautiful dress might look stunning — and it might really suit you — but you need to resist the temptation, or you’ll never save up anything.
Instant Gratification
You know when you really want something, and you want it right then? That’s the desire for instant gratification — the pleasure of having something you want when you want it.
You can blame it for your impulse buys when you purchase that expensive item. Acting on this desire drives you to make impulsive decisions that don’t take your financial position into account.
Saving may be difficult, but it’s not impossible. You just need a little dedication and a good plan.
Strategies for Saving Money
The first step to start saving is to actually want to save. And the next one is to adopt some best practices into your savings plan and follow them diligently. These include:
Setting a Financial Goal
Your financial goal will dictate what you’re saving for. What that goal is isn’t the point you just need something to work toward.
Let’s say you want to save up $500 by the end of the year.
That’s your financial goal. Now, you have to work toward this number. Giving it an actual value makes it easier to visualize how far you’ve come and prevents you from making unnecessary purchases when you remember your goal.
Eating at Home
Avoid making a habit of eating out — and not just your meals. Dining out includes getting your coffee from Starbucks every day.
Eating out occasionally with friends or family is completely fine, but if you make it a daily habit, your savings aren’t going to last. Eating at home cuts back on your food spending — and let’s face it, it’s healthier.
Using Extra Income Wisely
In the budget above, we had some extra income left over. Since all your needs are budgeted for and you’re saving, it’s okay to spend this money however you like.
But being smart about it is what will pay off in the end. Seek to invest at least some of that income in yourself, even if it’s just by sticking to your savings.
Looking Ahead
Since we’ve covered budgeting and saving, the next step is to look at how a financial institution (like a bank) can help you manage your money.
Since we’re learning about financial matters, it’s important to know what tools and resources can help you make better money decisions — and how to use them.
Like everything else, there is a responsible way to do things that brings you the most benefits.
Trust me, this is something you don’t want to miss out on!
