My wife and I got married almost two years ago, and similar to most newly weds, we were gushing with love but short on cash. A budget was entirely necessary for our survival. Initially, we focused only on one aspect of budgeting, because that’s all we knew, but actually, there are four aspects that one should focus on. I call these the Budgeting Basics.
1) Know how much money you have
Before you start planning where it is you are going, you need to know where you are. What is your current net worth? Take your current liabilities (home loan, credit card debt, car loan etc.) and subtract this amount from your current assets (cash, investments, home equity etc.). The remaining balance is your total net worth.
Right now, my wife and I are looking for a temporary rental to live in while we get settled in Michigan. In order to know what we can afford, we’ll have to know our initial cash balance in the event that we’ll have to pay first and last month’s rent, plus a deposit.
2) Know where your money comes from
Do you only have one source of income, or do you have 4 or 5? The more sources you have, the more secure you income is. This is why my wife has a side business, and so do I! 🙂
How much money do you make per month? And is it consistent? Do not factor in those bonuses that you might get or the raise that is possible. Only once you know this can you move onto the next step.
3) Know where your money is going
This is the only portion of the 4 areas that I thought about initially. I knew we had a limited income, and in order to survive, we would spend less than we made! It sounds easy, but this can actually be pretty tough if you make very little.
4) Know what your money is doing
It’s important to spend less than you make, but it’s even more important to understand what you are spending your money on. If you are going out to eat 10 times a month, this is wasteful spending, and you won’t reap any reward from this use of your money.
Make sure that your money is working for you. Invest at least 10% of your money in something that will give you a return. Something like your company 401(k), a home based business, property investing, etc. There are many potential options that could yield a return. All you have to do is make sure you pick one! Don’t be afraid to take a chance. The biggest chance you can take is not taking one!
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.