teenfinance

Here it is: The chapter that will teach you everything you need to know about budgeting your money. You have probably heard the word “budget” tossed around a lot, whether it’s your parents telling you that a certain expense “isn’t in the family budget,” or a newscaster talking grimly about the “nation’s budget deficit.” This chapter will focus on your budget. This is where you will really learn how to manage your personal finances and take control of your money.

A budget can be an exciting and powerful thing because it all boils down to your telling your money where to go. You are in charge. Instead of your money coming and going, leaving you broke and wondering where it all went, you will learn to take charge of your finances and figure out where you should spend your money and how much of it you should spend. If you want to be the boss of your money, budgeting is the way to do it.

Case Study: Budgeting an Allowance

Jasmine Richardson — High School Student

Whether a person is going into business or not, financing is needed to pay for everyday needs, and the use of a budget enables one to estimate the cost of items and set aside money to pay for them. I love to play video games, so five years ago, I went video game shopping at an electronics store. As I walked through the aisles, I found what I was looking for. I took my money out of my pocket to pay for it, but when I looked at the price tag, the amount I had was way below the price. I was determined to get it one way or another, so I decided to set a goal and buy the video game within the next three months with the money I had saved over that time.

When I returned home I developed a budget, listing the items I needed to buy and the amounts needed to pay for them. My parents gave me an allowance each week, and I decided to use some of it to buy school lunch and the rest to save toward the video game purchase. I figured that over the next three months, I would be able to buy my video game and hopefully have money left over.

By the end of the second month, I had over half of the money saved for buying the video game. It was right around the time of Valentine’s Day. I wanted to buy gifts for my friends. I needed money, and I needed it fast. So, I thought of the money I had saved for my video game. I figured that because the month wasn’t over yet, I could spend some of the savings and still have enough money for the video game by the third month. I spent some of the money on Valentine gifts, and by the time March came around, I had very little money left to pay for the video game. In fact, I didn’t even have half the money needed for it because I kept spending the savings on other things when I needed “fast money.”

My budgeting was a failure because I didn’t stay focused on achieving my goal. Instead of putting my goal of buying my video game as a top priority, I figured that because I had time to save, I would have enough by the end of the third month — this turned out not to be the case.

Looking back, I realize I should have put away some of my allowance for school lunch each week, then split what remained into video game savings and savings for other miscellaneous items. It would then have taken a longer time to save up for the purchase of the video game, but I would not have spent the video game savings.

The lesson I learned from that experience taught me that whenever I set a goal, I should make it my priority and stick with it until I achieve it. Everything went well until I thought the video game wasn’t a priority anymore and the Valentines were more important. My budgeting was unsuccessful because I had planned the expenses for the things I needed, but not the funding for the items.

What is a Budget?

A budget is a written plan for your money that takes a look at how much money you have compared to how many expenses you have. It is a relatively simple concept. You first figure out how much money you bring in (your income), and then figure out where your money needs to go. Here is an example:

Maria brings in a monthly income of $290 from her part-time job at the mall. She also gets a monthly allowance of $80 from her parents and usually makes around $40 a month babysitting. As far as expenses go, she is responsible for paying for her lunches at school and putting gas in the car she drives. Her parents pay her car insurance, and the car is paid off. Maria does have to pay for the membership fees for the various clubs she belongs to at school, totaling $20 a month, and has to pay for the costumes she wears for dance recitals. The cost of the dance costumes vary, but average out to around $25 a month when spread out over the entire year.

This means that Maria’s monthly income is around $410, which is the total of her three income sources combined. Her monthly expenses are a little more complicated. The amount of money she pays for her lunches changes weekly according to what she buys to eat, or if she instead packs her lunch. Her gas expenses vary, too, depending on how much she drives and what the gas prices are at the moment. When she sits down to look at her expenses, she can estimate an average cost for these things and come up with an estimated list of monthly expenses:

• Lunches: $80

• Gas: $50

• Memberships: $20

• Dance costumes: $25

• Total: $175

So far, Maria has an extra $235 for the month. Knowing that she will want extra spending money, she adds another expense to the budget list:

Entertainment money: $100

Now Maria is down to $135 left over, but don’t forget: She still needs to follow the 10 percent rule and put money into her emergency fund.

Emergency fund: $41

This leaves Maria with $94 dollars a month, which she can put away into savings, keep in her checking account, or use to cover other expenses like clothes, school trips, and miscellaneous things that come up. It would be wise for Maria not to leave that $94 floating around and not specify where it should go, though. After all, $94 a month for a full year equals more than $1,100. That is a lot of money to waste, especially considering it equals more than two months’ worth of income for Maria.

She has a few choices here. She can add more money to her emergency fund or put money away in another savings account for a specific expense. She can also add more money to her entertainment fund and ease up on her spending restrictions. Another option is to stop babysitting and have more time for herself, which she can afford because of the extra money she has left over when she analyzes her current budget. With whatever option she chooses, she needs to be very intentional in stating where the extra money will go — and not just assume that she’ll find somewhere for the money to get spent.

Maria decides to add another line item to her budget: Charitable giving. She intends on giving $20 a month to a charitable cause, such as the local animal shelter or to her church. This leaves $74 a month extra. She wisely decides to split between her emergency fund and her regular savings account, which she is using to save for a road trip she will take with her best friend when they graduate from high school in a couple of years.

Maria is in a good position. Some teens (and adults) find their budget stretched far beyond what their income can handle. Consider this scenario: Steve has a monthly income of $588 from his part-time job at a restaurant. He does not have any other source of income. Although Steve makes more money than Maria, he also has more bills to pay. Here is a list of his monthly bills:

• Cell phone: $40

• Online gaming subscriptions: $44

• Cable TV for his bedroom: $50

• Car payment and insurance: $340

• Gas: $45

• Entertainment expenses: $100

• Total: $619

Steve hasn’t even put any money into a savings account yet, and already he has budgeted for more than his monthly income. When a written budget looks like this, it is definitely time to make some adjustments. In Steve’s case, his biggest expense is his car payment and insurance. He obviously purchased a car that was far out his price range, especially considering he won’t even have enough money to make any repairs that are needed if the car breaks down. He can be sure, however, that even if his car isn’t working, he will still need to make the payments on time every month or he will find himself in big trouble. You will learn more about what happens when you stop making payments on a debt you owe in Chapter 6.

When a budget just doesn’t add up, as is the case with Steve, there are two options that can be explored: either bring in more income or reduce spending. A combination of the two options may also work.

How can Steve make this budget work? Although his best bet would be to sell his car, he also has the option of ditching the cable TV in his room and reducing his entertainment expenses. This would still be cutting it close, though, and in reality, most people can’t go every long without spending any extra money on miscellaneous items. Everyone wants to be able to go to the movies once in a while or indulge in a concert, so it simply isn’t realistic to not have any money at all for these types of expenses.

Steve also has to figure out a way to incorporate saving into his budget. He is setting himself up for financial failure if he keeps budgeting so poorly. If he can’t get rid of his car, he needs to drop other expenses and find a way to increase his income. It may be possible to pick up more hours at the restaurant or get a job that pays higher wages. Either way, his current budget isn’t working.

Just for the sake of argument, let’s say that Steve doesn’t sell his car, but instead lowers his expenses substantially and gets a nice raise at work. He is then able to start putting money into a savings account that will come in quite handy if his car needs repairs, and he feels a lot less pressure financially because he’s making ends meet and saving for a rainy day.

Case Study: Financial Sacrifices

Kelly — High School Student

The world of finances can seem so mysterious. What we forget is that — for the average student — saving money and having financial security is not about large investments and corporate confusion. Rather, the key to successful financial endeavors for teens is being careful with money simply on a day-to-day basis. Managing stocks and business can prove lucrative for some. However, it’s been my personal experience that — while trying to juggle my classes, SAT tests, sports, community service, and family obligations — meeting with a stock broker doesn’t really fit into my schedule. Instead, I’ve found that getting scholarships, asking for money instead of gifts, and differentiating your needs from your wants are simple, but extremely effective, ways to not only earn money, but keep it.

I’d like to begin by explaining my experience with financial sacrifices. It is important that anyone trying to be financially prudent understand that being wise with money 1) is a lifestyle and 2) does not come without sacrifices. I say that it is a lifestyle because wisdom — in any form — is not fleeting. If it were, it wouldn’t be wisdom. Saving money for a period is helpful, but if one returns to the spending habits that caused them to not have needed money, any efforts to save will have been in vain. I secondly say that it comes with sacrifices because it is difficult to discipline yourself. Especially in the United States, consumerism is hard to fight when everything is marketed so enticingly. With that said, I urge you: Do not ever compromise the things you hold most dear — family, your health, your faith — for the sake of money — ever. When I was in middle school, I thought I would be helping my family save some money by not eating lunch. My mom would write me a check that should have lasted a month, and I made it stretch for two. When she found out what I had done, she was hurt that I had lied to her and worried that I incorrectly believed money came before my wellbeing. My intentions were good from a financial standpoint, but that never justifies hurting those you love.

So, what are some positive ways to earn money? Scholarships are probably the most revered way for teens to earn money, but certainly the most misunderstood. While successful athletes are often offered sports scholarships, I know I can’t throw a football well enough to pay my way through college. I won one scholarship in my junior year of high school. I’ve observed in my four years of high school that scholarships are most often offered to seniors, so keep in mind with your scholarship search that as an underclassman, scholarships are extremely competitive. One way to relieve this pressure is by applying for local scholarships. The scholarship I won was sponsored by a local chapter of the Veterans of Foreign Wars. The scholarship was easy to find because all VFWs around the country do it, but also easy to win because I was only competing against the high school students in my school district. That solitary scholarship was one of many I had applied for that year. Although getting no answer from many scholarship foundations was daunting and saddening, I attribute my win to my strength in numbers. The fact of the matter is, the more times you get your name out there, the more likely you are to win something. One great aspect of local scholarships is they usually pay you in cash or check and pay no mind to what you spend it on. You can use it toward a car payment just as well as you can spend it on a college textbook. As my mom always says about scholarships, even in the worst-case scenario, you work on a scholarship for five hours and you only get $100 — so what? “Honey, I went to college and I don’t even get paid $20 an hour!”

Another way I’ve saved is by asking for money instead of gifts. Wouldn’t you rather receive versatile cash than getting a random gift from your great-aunt Betsey? Pick one (small) thing you really want for your birthday, Easter, Christmas, Hanukkah, or any other gift-giving holiday and tell your family that, for you, saving money for (insert expensive item here) is of paramount importance to you. They will appreciate your reasonableness, responsibility, and vocabulary — only aiding your cause. If whatever you are saving money for is something you feel has great significance — a mission trip, college, starting a business — then you shouldn’t be afraid to ask friends and family for their support, financially and otherwise. It shows how strongly you feel about your dream that you have the courage to tell people what your goals are. These were my tactics and mindset while raising $3,000 for a summer mission trip to the Philippines. I’m proud to say that in fewer than five months, I’ll be in Manila. I owe more or less all of it to choosing financial contributions over material gifts. To me, a ticket to the Philippines to mission is much more valuable than any other gift imaginable.

This brings us to another subject — distinguishing what we want from what we need. I’ve spent numerous summers at sleep-away camps. I stay for a month or more at a time away from family with girls I don’t know, without air-conditioning, without hot water, and I’ve found that not only do I survive — I truly enjoy the independent, different situations, and I make lots of friends.

How does this relate to finance? Through my experience at camp, I’ve learned that there are certain things that I can live without — central air conditioning, hot showers, and familiar faces. I’ve been able to identify the fact that living in a dorm without these things is not only possible to me, but familiar. So, for me, living in a dorm with no central air conditioning is in my best interest because it saves me money each semester.

It is more important to me that I save money for a down payment on a house than spending it on my dorm rent.

Think of the things in your life that you can and can’t live without. Make a list so that you can organize your thoughts in a tangible way. Maybe to you, a hot shower is imperative, but you don’t feel the need to buy the most popular and up-to-date clothing. Now you know which expenses can be eliminated once your budget tightens.

Saving money is a daily activity whose recompense is hard to quantifiably identify. It is quite easy to get discouraged when the reward is so far off — when you have to force yourself to fill out just one more scholarship application, or stop yourself from buying that beautiful necklace that you know you can live without. More importantly than anything, I’ve found it essential to always remember what you’re saving money for. My personal goal of going to the Philippines, for example, helped me to focus on my aspirations even when there were so many immediately pleasing things that I would have liked to have received for the holidays. I hope that you find what I’ve learned and experienced to be true and useful when put to practice in your own life.

Create Your Budget

Your budget may not be as complicated as the budgets in the previous section. Maybe your parents cover most of your expenses, so you only have to figure out where to spend your allowance. It is never too early in life to figure out how to budget, and if you can get into the habit of budgeting your money now, you will have a much easier time with money when you become older.

Write it down!

Some people have a loose budget they keep in their minds and never write it down on paper or enter it into a computer. They may tell themselves they can only spend so much on a certain expense and so much on another expense, but they do not make the effort to put their budget in writing. While it is admirable that they are trying to budget their money, their budgets would most likely be much more effective if they actually took the time to make a written budget.

Why is it so important to actually write down your budget? There are a few reasons, but one of the most important reasons is because writing it down allows you to actually look at where your money is going. How are you supposed to tell your money what to do if you don’t already know where it is going? By writing down your budget, you not only figure out where your money has already been going, but you can also tell it exactly where you want it to go.

You may be wondering, “What does it mean to figure out where my money has been going? I know where I spend my money.” Just knowing what store you spend your money at, or having a general understanding of the types of things you spend your money on, does not mean you are in control of your money.

Make no mistake about it; the main goal in personal finance is to control your money.

You will find that writing out your budget will help you immensely. Many people have taken the time to write out a budget only to be shocked when they realize how they actually spend their money. When writing down their budget, people who use credit cards often realize they actually spend more money than they make, which is never a good financial situation.

Here is how to write a budget for yourself:

1. Figure out how much money you make each month. This can be easy if you make the same amount of money every month. But if your income changes, you should average it out. For example, if you make $500 a month half of the year and $400 a month the other months, your average is $450 dollars a month.

Write down the total amount you make per month at the top of the paper.

2. Write down how much money you save each month. This is the amount of money you put into your savings account and can include both your emergency fund money and any other savings you regularly contribute to. If you don’t currently save any money at all, start by writing down 10 percent of your income for this category.

3. Figure out how much money you owe every month for recurring bills. Recurring bills are the type of bills you must pay every single month. Examples of these types of bills include cell phone bills, monthly gym membership fees, and car insurance, if this isn’t paid by your parents. If you have bills that are only paid once a year, like an annual club membership fee, divide it by 12 and put one month’s worth of the expense into this category. If some of your recurring bills vary in price from month to month, average the cost out.

Write down each recurring bill in a list under your total income and savings, then add up the total amount you spend monthly.

4. Figure out how much money you spend on other expenses. Estimate how much you spend every month for food, gas for your car, going out with your friends, buying clothes, and anything else you spend money on. This is the category where you would list expenses like your trips to Starbucks or the songs you pay to download off the Internet. Don’t worry if you don’t know the exact amounts. Right now, you are just trying to get a budget started and will probably adjust it plenty of times before you get the numbers right.

Create some categories for these expenses, such as “snacks” or “clothes,” and list each of them separately right underneath your recurring bills. Total up these categories, too.

5. Do the math. Add up all your expenses, including the recurring bills and the other expenses, then subtract this total number from the income you wrote down in the beginning.

Your budget may look something like this:

Income: $375

Savings:

Emergency fund: $40

Other savings: $40

Total: $80

Recurring bills:

Honor society monthly dues: $5

Netflix membership: $19

Cell phone: $38

Bus pass: $18

Total: $80

Other expenses:

Lunches: $80

Clothes: $40

Books: $20

Movies out: $35

Charitable giving: $20

Music downloads: $20

Total: $215

TOTAL INCOME: $375

TOTAL EXPENSES: $375

The example above is considered a balanced budget, which means the person writing the budget does not spend more money than he or she earns every month and also can account for all the money that comes in and goes out. Another great feature of the above budget is that not only does the person have both an emergency fund and a regular savings account, but he or she also makes room in the budget to buy fun things like books or a night out at the movies. Additionally, there is still room in the budget to give some money to charity, as well.

Use the example above to craft your own budget, or visit one of these fun Web sites to help you create a budget online for free:

• http://printables.familyeducation.com/teen/money-management/57920.html

• www.moneyandstuff.info/lessons/2CBudgetingSaving_Budgeting.pdf

• http://master.teen.growingmembers.com/Learn_to_Budget_119.html

Don’t panic if your first attempt at a written budget does not come out as clean as this example. You may have to move some money around a little to make the numbers come out equally, but keep in mind: Hardly anyone can get a complete budget written correctly in the very first attempt. Think of your first attempt as a rough draft, and be prepared to revise it more than once. It may take a couple of months before you get a budget written that actually works and is balanced, and you will probably constantly revise that budget as new expenses come up or as you make more money. Also, some people suggest first spending a month writing down all the purchases you made during that time period. This will make you more aware of how your money is being spent. From there, compose a budget based on how you would actually like to spend your money. However, you can also complete a rough draft of your budget in the beginning while tracking your spending at the same time.

How do you revise your first draft? If you have the fortunate problem of having more income than expenses, do this:

1. Make sure you are listing all your expenses accurately.

2. Figure out if you can add more money to savings.

3. Add another line item for something you have been wanting to buy, but didn’t think you had enough money.

If your first budget draft reveals higher expenses than income, do this:

1. Examine where you might be able to cut back on expenses, such as buying fewer DVDs or spending less on clothing each month.

2. Figure out a way to increase your income.

A budget isn’t just a written listing of where your money should be going. It can also be a guideline of how much money you can actually spend. For example, if after writing your budget you realize you don’t have enough money to cover all your expenses, write out how much money you can actually afford to spend for the unnecessary expenses, and then stick to that plan.

If you need extra money for a certain expense one month, you must take that money from a different expense. For example, if you have to buy a birthday gift for your friend, but don’t have any money budgeted for the gift, you can spend less on song downloads to make up the difference.

If you can stay within your budget, you will have mastered a personal financial task that many adults never even manage.

Case Study: Change Adds Up

Parris — High School Student

In an effort to raise money for college, I’ve actually gone against all normal money-saving techniques and spent money. How do I save money while spending it? I simply never pay with exact change, and all the change I get back from paying up to the next whole dollar gets put into a jar for college. It may seem like I wouldn’t have a lot of money saved from this action, but actually, I’ve learned quickly that every penny saved adds up quickly.

I’ll be keeping at this method until I have all the money saved that I need. This method means every time I go shopping or go out to get lunch, I end up putting a portion of what I spend away toward my college funds.

This is the easiest way I have found to still spend moderately but also be able to put money away toward college every single day. Saving change out of every dollar is also easy to do, and it’s a great way to get money from your parents. Change is something many people tend to not care about anymore, so parents usually don’t have a problem just giving up whatever comes out of the washer or pennies that they get. Now, though I say I spend and save, I have to be sure I spend wisely. I’ve made sure to set a limit on how much of my money I spend every week. Instead of going out to dinner with my friends all the time or going to the movies, I’ve limited myself to only on weekends; that way, I don’t just blow money every day.

Another way I save money I will be using toward college is by working and making sure I keep a portion of my paycheck in a savings account. I work up to 30 hours a week, but because I’m still trying to make it through my senior year, my bosses have been great about keeping my schedule during the week down to a minimum and giving me most of my hours during the weekend. Since the New Year, I made it my goal to keep $100 out of every paycheck in an account. Besides keeping all of my change in a jar, I also save $100 out of every check. The hardest part about saving money away is making sure it stays saved. To make sure that I never spend any money that I save, my savings account was made so that I actually can’t take money out of it without my mother getting it for me. Though I really hate not being able to access my own money whenever I want, I know that in the long run, it will be so helpful to have all that money put away and kept there, no matter what.

Besides the $100 I put away from every paycheck, if I have any money left over from the last paycheck by the time that the next week comes around, I put that money in my savings account where I won’t touch it until it’s needed for college. Basically, what I’ve learned from saving money for college, or anything important, is that if I don’t have the cash on me, I won’t spend it. Also, I’ve learned that every penny really does matter. When trying to save money, I just have to keep track of everything I spend and put away all my change, no matter what.

Track Your Spending

Tracking your spending doesn’t have to be hard. You don’t have to carry a calculator around with you everywhere you go or keep a running tally of every purchase you make. If you can find a tracking method that works well for you — and that you don’t mind actually keeping up with —you will soon find that your budget starts to fall right into place.

Case Study: Advice from a Financial Expert

Andrew Housser — Co-CEO of Bills.com

Here is what you need to know about managing your finances right now:

1. Managing your finances today — no matter how little money you may have — will set the course for your future. Learning to manage finances well will make a difference in an interest rate you get on a car loan or home loan later in life, and may even impact a job search, or whether you get a particular apartment.

2. Managing your finances means you’re more likely to have financial freedom sooner in life. It also means you will have choices to do what you want.

3. It’s about goals. It’s hard to get somewhere if you don’t know where you’re going. Write down your short-term and long-term goals, which might range from having time to practice for a sport or buying an iPod to saving for college. Once you have goals in mind, you can budget for those goals and adjust accordingly. Saving with a specific goal in mind is much more achievable.

4. Budgeting. Learn what a budget is and how to create and use one.

5. The importance of saving. Making a habit of saving a percentage of every single check, no matter if it comes from a birthday gift or a part-time job, will make a huge difference in life. Aim for 10 percent, but any percent saved, consistently, will make a difference.

6. Pay bills on time; in full, every bill, all the time. Live within your means.

Cash envelopes

One of the easiest and best options for tracking your spending and making sure you stay within your budget is a cash envelope system. This system only works if you use cash instead of a debit card or credit card, but it is really easy and highly effective. This works well for people who already use cash for all their purchases or for people who feel like they spend too much when they use a card.

$ave $mart Tip

When using an envelope system, use sturdy envelopes instead of thin paper envelopes so you aren’t constantly replacing them.

Here is how a cash envelope system works:

1. Gather enough envelopes to match every budget item you have. For example, you will have one envelope for lunch money, one envelope for clothes money, and so on. Label each envelope with the budget item it represents. If an envelope is for gas money, write “Gas Money” on the outside of the envelope.

2. Withdraw cash from your account for the amount of money you have budgeted for each item. For example, if you budgeted $15 a week to buy snacks at school, put $15 into the “Snack” envelope. You can also choose to put $60 in the “Snack” envelope if you’ve budgeted on a monthly basis instead of weekly. Keep in mind: You may be less tempted to spend all your money up front if you only withdraw what you need for a week.

3. When you make a purchase, take the money directly out of whatever envelope corresponds with the purchase. For example, if you buy gas for your car, the money should be taken out of the “Gas” envelope to make the purchase. If you buy a snack at school, the money should come out of the “Snack” envelope. If there is any change left over after you make your purchase, it should go right back into the envelope it came out of. So, if you pull a $5 bill out of the “Snack” envelope to buy a $1 cookie, $4 should go back into the same envelope. Don’t put the money back into your wallet. This system only works if you keep the money where it belongs according to your budget. Don’t carry all your envelopes with you all the time; only take the money you need with you.

4. If you run out of money from a particular envelope, you know you have met your spending budget for that particular expense. If you want to stick to your budget, you shouldn’t pull money from another envelope to restock the depleted one. In the beginning stages of using the envelope system, you may find yourself adjusting how much money goes into each envelope, so don’t be surprised if you have to shift cash around a little. Make note of any changes you make so you can adjust your budget accordingly.

5. At the end of the month, take a look at how much money you have left in your envelopes. You should also take note of how quickly you ran out of money from specific envelopes. By keeping track of these things, you should have no problem figuring out if your budget works and if the amount of money you allow yourself to spend for specific expenses is realistic.

The pros and cons of the cash envelope system

There are both pros and cons to using a cash envelope system. The most important thing is whether or not this system works for you. It is unlikely you will continue using a system you don’t like or you don’t think works very well. The following are a few pros and cons about the system.

Pro: It is really easy to monitor how your money is being spent because you can actually watch the cash disappear from the envelopes. This method is very different than using a credit card or debit card. With a card, your money is abstract because you can’t see or touch it.

Con: Sometimes using cash instead of a credit card or debit card can slow things down. People at cash registers have grown accustomed to people swiping a card to make purchases, so using cash may take just a little longer as the clerk counts back your change. The extra time is so little, however, that this really should not be a deciding factor against using a cash envelope system.

Pro: You will probably wind up spending less if you pay with cash from an envelope. When you use a debit card to make purchases, you never actually see the money. You are more likely to think purchases through when you actually have to part ways with the cash. It causes you to ponder, “Do I really need to make this purchase, or would I rather save my money for something better?” Suppose you have $5 left in your “snack” envelope, but three days until the envelope will be refilled. In this situation, you will probably be much less likely to splurge on a $4 smoothie because you know that this purchase will almost wipe out the money you have left. To the contrary, with a credit card or debit card, you may not even realize you only have $5 left until after you have already bought the smoothie.

Con: If you misplace the cash, it’s gone. Suppose you lose your envelope containing a week’s worth of lunch money. Unless you are really lucky and someone finds the envelope and returns it to you, there is a good chance you will never see that money again. You have to be extra careful about keeping track of your envelopes because losing an envelope usually means losing the money too. You also have to find a secure place to put the envelopes. For example, if you have a brother who likes to go through your wallet and take money without permission, you will need to find a spot to stash the envelopes without his knowing where they are. You also don’t want to carry envelopes around that you don’t really need. Don’t carry all your envelopes in your backpack to school if you only need access to the “lunch money” envelope.

Pro: It’s easy to adjust your spending when you use cash envelopes. If you don’t have enough money in your “gas” envelope to get you through the end of the week, but you do have extra money in your “movie night” envelope, take the money you need for gas from the movie night envelope. Unfortunately, this will mean you will have to skip the night out at the movies. Keep track of any money transfers so you know what adjustments to make to your budget the next time payday rolls along.

Con: Having envelopes full of money may give you the illusion that you actually have more to spend than you do. Keep a close eye on how much money is actually in your envelopes when using this system.

It isn’t necessary to physically carry the envelopes with you when you plan to make a purchase. If you know you’ll need $6 for lunch, take that amount out of the envelope and put it in your wallet or pocket. It should be used for lunch and nothing else. Any change from the lunch money should go back into the appropriate envelope. Remember: The cash envelope system doesn’t work if you don’t keep track of which envelope the cash goes into. Otherwise, they are just a bunch of envelopes stuffed with cash that you can use with reckless abandon. That’s not smart money management at all.

Cash envelope systems work well when they are used to both track spending and to stay within your budget. It is a good idea to take a look at how much money you have left in your envelopes (if any) when the times comes to put more money in because this will give you a good idea of where your money is going.

Case Study: Learning About Budgeting

Christina — High School Student

I have recently learned to set a budget. Four weeks ago, I started my first job, and I have received three paychecks. Out of those paychecks, I have to save 60 percent. Right now, I don’t have debt, but soon I will have a car, and with a car comes insurance and gas that I will have to pay for. I also have college to think about. I have to build my savings for college because I want to go to a major university.

My plan is to first save the 60 percent my parents tell me I have to, and then I have to learn to make good choices in the things I spend the rest of my money on. Second, if I can, I will save more of the 40 percent I have left. Right now, my parents make sure I have food and clothes, so there isn’t much else that I need. So honestly, I can save more. Third, I have 2 ½ years until I graduate high school; I want to have $6,000 saved from my jobs. Then, if I get scholarships, I should be all right for a few years. Last, in order for me to be where I want to be in the future, I need to stick to the plan now.

In the end, making a budget and saving is not easy, but it is necessary if you want to achieve your goals!

Spending logs

Spending logs are lists that show how much you spend and what you spend your money on. With spending logs, it doesn’t matter how you pay for things, as long as you keep track of what you are spending. Spending logs can require a lot more work than using a cash envelope system, but with this system, you get to choose how you pay for things, and you aren’t limited to paying for things in cash all the time. For this reason, spending logs are great for people who do not want to be limited to using cash for all their purchases. You can use a debit card, or even a credit card, to buy things, but you have to write down every bit of money you spend. You can decide whether to have separate spending logs for cash or credit, but for many people, the simplified version of one spending log works best.

You have the option of creating your own spending log or buying one that is already formatted from an office supply store. You can also buy computer money management software, such as Microsoft Money, Quicken, or Moneydance, that allow you to input purchases and have the program categorize the spending for you. Some of this software will even create graphs to show you how you spend your money. If you are a visual learner, a program like this might be helpful to you because it will present all the information to you in a visual form that is easy to understand.

If you don’t want to use money management software, then you need another way to record your spending. Some people carry a notebook and record all the purchases they make as they make them, while others keep their purchase receipts throughout the day and then write everything down when they get home. For example, if you spend $1.87 on a soda and a candy bar, you would record “$1.87: soda and candy” in the notebook. Some preprinted spending logs are designed with columns that allow you to write down the category your purchase falls into, which may make it easier for you when trying to determine what adjustments you need to make to your written budget.

Spending logs are of little use if you don’t actually take the time to analyze your spending. At the end of the month or week (whichever length of time you decide to use; it’s up to you), look at the spending log and determine in which categories you are spending your money. Ask yourself, “Am I spending my money wisely, or am I wasting most of it on stuff I don’t need?”

Follow these steps to analyze your spending log:

1. Write down the categories from your budget on a piece of paper.

2. Categorize the spending listed on your log according to the categories from your budget.

3. Add up the money you spent in each category and write down this amount.

4. Look at the total amount you spent compared to the amount you budgeted. How close are the amounts? If you went over budget, the amount will be more than the amount on your written budget. If you went under budget, the amount will be less than the amount on your written budget. Keep in mind: The amounts rarely come out exactly even, but if they do, you should commend yourself for not only writing a realistic budget, but for sticking to your budget so well.

You should also look at what specific purchases you made. Your spending log may reveal that you spent a lot of money on a particular expense, especially if it is a recurring expense, like lunch or daily snacks. You may not have realized you were spending so much on that one category. This may help you make wiser purchasing decisions if you are running out of money quickly or spending money on items you don’t really need. You may also be surprised to find that some of your expenses aren’t as costly as you once thought. For example, you may think you spend a ton of money on gas, but once you begin using your spending log, you might realize you don’t spend nearly as much as you think. This is good news. It will open up more money in your budget for other expenses.

It’s important to remember there is nothing wrong with buying things you want as long as you can afford it. In other words, don’t beat yourself up over buying an extra-large popcorn instead of the small popcorn at the movie theater if you can indeed afford to pay for the larger popcorn and you won’t waste it. Things like sharing a big tub of popcorn with your friends is the kind of expense you should be able to make room for in your budget — as long as you aren’t ignoring other necessary expenses to make room for the popcorn.

$ave $mart Tip

“Any time you get money from any source, put 10 percent of that in your savings account immediately. Over time, you will never miss it, and it is a lot of fun to watch it grow.”

Christopher Lawson, private wealth advisor

Don’t mistake this advice as permission to run around buying whatever your heart desires, though. It is important to remember that while you should be able to enjoy the money you earn, you need to learn how to manage it effectively. First learn to manage your money, then learn to enjoy it.

Sample spending log

Date	Amount Spent	Purpose
11/12	$4.00	Smoothie @ The Smoothie Shop
11/12	$14.33	Gas for the car @ A-OK Gas Station
11/13	$5.00	December Membership Dues: Honor Society
11/15	$6.41	Breakfast @ The Egg Cafe

Try keeping a spending log for the first month after you write your budget. Keeping an accurate spending log will reveal to you if you actually spend money like you think you do. Chances are, you don’t realize where all your money goes or how much you actually spend. If, after this first month, you decide that a spending log isn’t for you, you can explore some of the other options for tracking your spending, but you will probably still learn quite a bit about your spending habits just by keeping the log for a month.

Cards

Some people just don’t like to use cash for purchases. If the thought of using a cash envelope system made you cringe and the idea of keeping a written spending log made you want to close this book and walk away, a card system for tracking spending may be best for you.

Did You Know?

Prepaid debit and credit cards have notoriously high fees. While not all prepaid cards feature fees, some gobble up balances quickly. If you buy a prepaid card, make sure to read the information accompanying the card so you know you aren’t buying something that will wind up costing you a lot of money.

To use this system, you will need to have a debit or a credit card. It doesn’t matter if the card is a traditional credit card, store credit card, prepaid credit card, or a debit card, as long as you receive a statement for your spending on a regular basis. This method is best for people who have access to cards for spending and who are willing to carefully monitor their own spending. Before the card system is explained, read through the explanations for the different types of cards that can be used:

Debit cards are issued by your bank or credit union. They may have a Visa or MasterCard logo on them, but they aren’t actually credit cards, which are explained below. Instead, they are attached to your checking account. These are different from ATM cards that are sometimes issued to account holders who do not qualify for a debit card through the regulations of the financial institution. Each time you use the debit card to make a purchase, the amount of money needed for the purchase is directly debited from your account. For example, if you swipe your debit card at the store to buy a $19 DVD, that $19 is taken immediately from your account by the merchant, and that amount of money is no longer available to you. If, before you purchased the DVD, your bank account balance was $200, once you purchased the $19 DVD with your debit card, your account balance immediately became $181.

Prepaid debit cards aren’t attached to your checking account, but instead are attached to a balance initially loaded on the card when the card was purchased — whether your parents bought you the card as a gift or you bought it for yourself. These cards are similar to gift cards that can be purchased through specific stores. The main difference is that these cards contain a Visa or MasterCard logo, which means they can be used at multiple stores, rather than just the one store the card was purchased at. These cards are similar to a traditional debit card in the sense that you can only spend the amount of money that is available to you; however, these cards are not attached to an account at a financial institution. For example, suppose your parents buy you a prepaid debit card from a store or financial institution in the amount of $50. As long as there are no fees associated with the card charged against the balance, you’ll have $50 available to spend. You swipe the card at a store and the amount of the purchase is deducted from your available balance. If you buy the $19 DVD with your $50 prepaid debit card, your card will then have $31 available.

Some prepaid cards are reloadable, which means you can add more money to the balance anytime. Not all cards are like this. On non-reloadable cards, once you have spent the full balance, the card is no longer usable. Prepaid debit cards are also sometimes referred to as prepaid credit cards, which are the same concept and are not real credit cards.

Credit cards and store credit cards (credit cards that can only be used at the store that issued you the card) are revolving accounts, which means you borrow money from an available balance given to you by a credit card company every time you make a purchase. When you buy something using the card, that amount of money is subtracted from the total amount you have available to you. When you make a payment, your available spending balance goes up. Most credit cards come with a set available spending limit. After you apply for the credit card and are approved, the credit card company sends you a card and specifies that you can only spend up to a certain amount. Suppose you obtain a credit card with a $500 credit limit. This means you are able walk into a store and spend a total of $500, but you cannot spend more than that. If you try to spend more than your credit limit, two things could happen. First, the purchase may be rejected or declined. Or, the purchase will be accepted, but you will be charged massive fees for spending beyond the limit set by the company. Credit cards will be discussed further in the next two chapters.

Credit cards, debit cards, or prepaid debit cards are a great way to track your spending because a record of purchases made is kept by the bank or credit card company. Each month, you will receive a statement in the mail, online, or through e-mail allowing you to review exactly how you spent your money. You will be able to see where and when you made a purchase and how much money you spent. However, the statement will not show you the specific items you bought at a store. It’s important to keep track of the individual items you purchased if using a credit card statement to track your spending.

In most cases, you won’t have to wait for a statement by mail in order to view your purchases. Most cards, whether traditional or prepaid, will allow you to access your account online any time of the day. This is really handy for monitoring your spending because, for most people, it is a lot easier to remember why you spent money at a certain store if you look within a few days of making the purchase instead of a few weeks afterwards. To find out if your card has this feature, visit the Web site for the company that issued the card or talk to a customer service representative. The customer service telephone number can often be found on the back of the card. You will also likely receive information about setting up an online account when you receive your card in the mail. Once you find the correct Web site, you will need to set up an online account before you can look at your spending log.

Some financial institutions offer programs that track your spending for you or allow you to export your spending information to another program on your computer that tracks your spending. For example, most financial institutions will have an option on their Web site to export your spending information to your money management software, such as Microsoft Money or Quicken. Using this feature can save you a lot of time and effort.

You’ll analyze this information just like you would if you had maintained a written spending log, although if you use money management software to keep track of your spending, there will be a lot less work involved. If you use your card to obtain cash from an ATM or ask for cash back when making a purchase at a cash register, you will need to manually record the purchase in your check register or spending log and notate what you used the money for when you are reviewing all your card purchases. In fact, if you withdraw a lot of cash out using your card, you may find yourself in a situation where you need to keep a separate spending log for your cash withdrawals. By keeping a separate log of purchases made with cash, you will have an easier time analyzing your purchases at the end of the month. Even if you have a budget category for “spending money” and plan to withdraw cash for this category, you need to know what you’re spending it on and why.

When you analyze your purchases at the end of the month, ask yourself whether you are spending too much and not saving enough. Ask yourself if you spend too impulsively, or if you are as careful as you should be with your money.

There is one important thing you need to know about using cards to make purchases, regardless of whether you’re using a debit card attached to a bank account or another type of card: You will probably spend more using a card than you will if you use cash. It’s too easy to just hand over a card to make a purchase without really looking at the total amount you spent. Even adults have a hard time with the concept of using plastic as money. They know the money will be debited from their account or the amount of the purchase will be added to the total amount of money they owe to their credit card company, but psychologically, it just isn’t the same thing as paying with cold hard cash.

$ave $mart Tip

“Start saving right now. Even if it is a dollar a week or month, you should begin making this a habit. As you get older, you will have more to save and you will be in the habit. Snowballs start small, but if you keep rolling them they get bigger and bigger. It is responsible to live within your means. Overspending is like overeating, it leads to many problems that have no easy solutions.”

Ken Washer, DBA, CFA, CFP, associate professor of finance Creighton University

Never underestimate the psychological factor associated with spending money. If you notice you spend more money with cards than you do with cash — even if you tell yourself you won’t spend more than you plan on spending — it may be time to stop using cards and switch to paying only with cash. That’s the great thing about managing your own finances: You’re in charge, and if you know something isn’t working well, you can switch it up to something that works better. It’s your money, and you get to decide how to manage it.

Checkbook Registers

No matter how you decide to keep track of your spending, you should always stay up-to-date on your checkbook register if you maintain a checking account. Maintaining a checkbook register allows you to always know how much money you have available in your checking account. Your financial institution will give you a checkbook register when you open your account, and in this register, you should record any transaction, whether it’s a deposit, a withdrawal, or a fee.

Here is an example of what your checkbook register might look like:

Check #	Date	Transaction Description	Withdrawal	Deposit	Balance
	11/23	ATM Withdrawal	$20.00		$453.22
112	11/23	Galore Bookstore	$12.68		$440.54
	11/26	A-OK Gas Station	$22.97		$417.57
	11/26	Paycheck		$400.00	$817.57
113	11/28	Car Payment	$194.25		$623.32
	11/28	Phones & More Outlet	$14.99		$608.33

Your checkbook register is used to keep track of debits and credits to your checking account. It is different from a spending log in the sense that it only keeps track of your checking account activity and does not record anything you buy with cash. Even though a checkbook register is not a complete spending log, it is still important to keep it accurate and up-to-date. If you don’t know how much money is in your account, you may make a mistake and wind up writing a check that you don’t have money in the account to cover.

Deciding how to track your spending

Which method should you use to track your spending? It’s a good idea to start with whatever method seemed most appealing to you when you were reading through the descriptions. If you give it a try and don’t like it, you can try a different one. Your parents may also have great tips regarding how you should track your spending, especially if they actively track their spending on a regular basis. Depending on your spending habits, you may wind up creating a totally different tracking method comprised of a mixture of all three methods, or you may even create a method that is completely unique. It doesn’t really matter which method you use, as long as you are actually tracking your spending and learning how to effectively manage your spending. Tracking your spending tells you where your money is going and reveals to you important things that you may need to change. For example, you may not realize you waste a lot of your money until you actually make the effort to track how it’s being spent. You might also discover you can afford to save more money, or you have enough money left over each month to contribute generously to a charitable cause that you care about. You’ll never know these things unless you take the time to take a good look at how you spend.

If you still aren’t sure about which tracking method you should try, answer these questions:

• Are you willing to use cash for all your purchases? If so, start with the cash envelope system.

• Are you good at keeping written records? If so, start with the spending log system.

• Are you looking for the most convenient way to track your spending? Can you avoid making impulse purchases? If so, start with the card system, utilizing money management software to assist you.

There is nothing wrong with deciding that one method doesn’t work for you and trying another method instead. A lot of managing personal finance is trial and error, so if one method doesn’t work for you, don’t stress. It isn’t an indication that you can’t handle your money. You can handle your money; you just need to find the way that works best for you.

Case Study: Taking Control of Your Finances

Amy — High School Student

It is an exciting, and also somewhat frightening, time when you begin taking control of your own finances. Taking responsibility of your money and what you must spend it on is key. When one reaches the point where they are able to put aside personal desires and concentrate on their necessities, it is a defining moment.

I currently work as a cashier at a grocery store and babysit a few nights a week. The process of filling out job applications and attending interviews was very extensive. Over the course of one month, I filled out over a dozen applications. I went to clothing stores, restaurants, grocery stores, and other various businesses and attended a total of four interviews. While much of my time was spent unsuccessfully searching for a place of employment, this experience proved beneficial. I found out, as each interview progressed, that dressing professionally and carrying myself in a modest manner made others show respect toward me.

With the money that I make from cashiering and babysitting, I pay for my gas, car payment, and insurance payment. I know the total I will spend each month, and I am responsible for making sure I have that amount in my checking account. Each time I receive a paycheck, I put aside a small amount for unexpected expenses and am aware of what I have left over for personal satisfaction. There have been instances that occurred where I had to use money from savings, such as having a flat tire, and I was grateful for having money put aside.

A major part of balancing finances is to know when it is acceptable to spend money and when it is not. Let’s say you were to buy breakfast every morning before school and spent five dollars for a coffee and a breakfast sandwich. $5 may not seem like a lot of money, but when you multiply it by five days a week, then four weeks a month, you have spent $100 on breakfast when you could have eaten a bowl of cereal and drunk a cup of coffee before leaving your house in the morning. It is nice to buy things for yourself occasionally, but it is extremely important to know when it is appropriate.

Having a job and paying bills during high school has proved to be a great learning experience. From having a checking account and debit card, I have learned the true meaning of responsibility, as well as self-control. I feel like I am now a mature young adult who is able to determine what is truly important.

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