Budgeting Part 1: Knowing where your money goes

Welcome to the financial health portion of our talks!

Whenever I talk about financial health the very first thing I talk about is budgeting. As Dave Ramsey says, one way or another your money is going to leave you. Budgeting is telling it where to go.

Budgeting is actually a very simple process. Write down what you make in a given month (if your income is variable, do this on a weekly basis), write down all of the things that you pay for in that same month, and see if the numbers match. If they don't match, find a way to make them match.

Despite the simplicity of this practice, many people live without a budget. They travel from paycheck to paycheck in a stressed-out mindset because they don't actually know where their money is going. Frequently these same people are spending dozens or even hundreds of dollars every month on things like coffee, fast food, or - heaven forbid - cigarettes, without realizing just how much of their money is being poured into these expenses, all the while wondering why they can never seem to make rent. If your spending feels out of control, if you reach the end of the month and wonder where all your money went, or if you're just wanting to fine tune yourself financially, budgeting is the first place to start.

Step one of budgeting: you have to know where your money is really going. Every single item you spend money on has to be listed somewhere in your budget. When you sit down in front of a blank paper it can be easy to forget about all those little 'extras' that you spend money on throughout the month, but they all need to be accounted for. If not, you'll end up with a situation where your budget is a lie, and there isn't a lie in the world that can help you improve your life.

Knowing where your money is going can be tough at first, but there's a few simple ways to find out. You can keep all your receipts for 30 days and tally up the number at the end, you can keep a written log of every purchase, or you can pull up your bank and credit card statements and see what transactions are listed. If you pay cash for some things, these transaction lists won't be complete. But they'll still give you a good idea of where you're starting from.

Am I saying it's not OK to drink Starbucks? No. If I were to say that, I'd be a hypocrite. What I am saying is that if you're going to drink Starbucks you have to have that in your budget. Some people budget for it specifically, with a line item just for all of their morning coffee. My husband and I budget for it broadly, tossing Starbucks in a category with social lunches and date nights, among other things. This category has a total number that we allot it each week. Budgeting this way allows us a certain flexibility with our extras. If we have an unexpected opportunity to go to dinner with friends at the end of the month, we're not borrowing from the unspent "Starbucks" line to do so. This - for us - is a way of staying honest in our habits. We know that as long as we're not practicing borrowing from one line to pay for another, we'll never find ourselves borrowing from the utilities budget to pay for a trip and then not being able to pay our utilities.

This is another area where you have to know yourself. Does Starbucks need to stay in its own category for you? Great. Know that, and use it.

Today, start your budget by writing down where every dollar of your paycheck goes. Be specific. Be honest. Be thorough.