Budgeting Basics

Budgeting Basics

A budget is the most effective tool in your personal finance toolbox because it helps you make the most of the money you earn and save—however little or great. According to Real Money 101, a publication put out by the New Jersey Higher Education Student Assistance Authority, you should begin mapping your budget with the following four categories:

• Needs (think basic food and a place to live)
• Wants (your favorite magazine subscription and a night out on the town)
• Short-Term Goals (Vacation in the Bahamas)
• Long-Term Goals (Buy a house)

Once you know where you want your money to go, then you need to figure out where it is going each month and how much you're making. Keep track of all your expenses, writing them down in detail—everything from your car payment to your morning donut and late-afternoon bus fare. Then calculate your total income, including wages and even that monthly mad money from Grandma. Ultimately, you want to subtract your expenses from your income and see how much is left over. Remember, your expenses include money for your bills, money you save, money you invest and money you give away.

Ouch! Do your expenses exceed your income? It's time to either reduce your spending or increase your income. Otherwise, debt is your only option and the deeper you sink into that, the harder it is to pull yourself out. Good money habits lead to financial freedom.

That is especially true when it comes to plastic. The urge to just buy it all can be really strong, especially if you've got a credit card in your pocket. But, buyer beware! Credit cards come with some serious responsibilities. So, before you sign up for your first piece of plastic, make sure you do the following:

• Research credit card companies and their options. Go with the one that has the lowest interest rate and the least amount of penalties if you miss or are late with a payment.
• Know your credit limit (how much you can spend) and what happens if you go over that limit.
• Stick with one charge card. Department stores will try to lure you into getting their credit cards, but they often come with higher interest rates.
• Set boundaries. Determine beforehand what you will put on the card. If the card is strictly for gas, books or emergencies, then keep it that way.
• Read the fine print about penalties and interest rates.
• Only spend what you have!

When you repeatedly overspend and don't pay off your credit card bills, you earn what is called "bad" or "poor" credit. Poor credit sticks with you for a long time and affects your ability to get school loans, buy a car, buy a home and start a business. So charge with care!