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By Andy Obermueller
Andy, I’m going to be a junior in high school. I have a part-time job and try to save all I can maybe for college but maybe not. What is the best way to handle all the things I’m going to have to take care of?
Good question. And a big one.
I’m going to give you an answer that most people just hate:
The best way to start is with a budget.
A budget is nothing more than a detailed subtraction problem — it’s no more complicated than that. I’m not sure what the official dictionary definition is, but in general a budget is a detailed income and spending plan for a set period of time, usually a month.
Memorizing that definition, though, won’t get you where you need to go.
That’s because a budget is more than a piece of paper, it’s a way of thinking.
Consider the person with no budget. She’s happy. She’s care-free. She has money in her pocket and only one real question on her mind: Do I have enough cash on hand to do what I want right now?
It’s the last part that makes the biggest difference — the “right now.” That’s where the budgetless person lives, in the now. That’s great if you’re a Zen master. If you want to be yourself in line for long-term financial success, though, it’s the wrong mindset.
The Budgeteer is every bit as happy and care-free, not because he lives in the moment but because he is mentally and financially prepared for anything that comes his way. He can handle it. The question he asks is not, “Do I have enough cash in my pocket to buy [whatever]?” Instead, he looks at the purchase he is considering and asks whether and where it fits in with his broader financial goal. If it doesn’t, then he skips it.
Carefree Girl heads to Starbucks every morning on her way to spin class and drops $12.85 on a snack and a coffee. Our Budgeteer is beyond that. He treats himself to a latte and a scone every so often — but he never goes a month without putting $250 in his investment account. Long after the coffee has been forgotten and Carefree Girl is on to the next adventure, our Budgeteer’s dollars keep working for him.
Don’t pooh-pooh that and miss the good part: In two years, he’ll have $6,645.55 (assuming he collects the long-term results of the U.S. stock market and reinvests dividends). After 20 years, Carefree Girl has had a lot of coffee. Budgeteer, for his part, has socked away $60,000 — and it has grown into a total account balance of $184,095.51.
That’s not a typo. That’s not something that only other people can do. It’s real, it works and you can absolutely do it -- you just have to decide to get started.
You can choose from several approaches when you do.
I like the “CSI” approach the best. It takes a commitment, but it’s likely to yield the best results.
Get a large envelope, the kind big enough for an unfolded sheet of paper with a metal clasp. Put the folder where you put your phone each night — maybe on your dresser. Each day, as you empty your pockets, collect the reception from every purchase you made. If you don’t get a receipt, like when you grab a Coke from the vending machine, write one for yourself. When you pay your rent, write a receipt. When you pay a bill, stick it in the envelope.
Do this religiously for three months. Don’t worry about how you are spending, worry about saving receipts.
Then, after 90 days, dump out the envelope and separate the receipts into three piles by month. Then make a list of what you spent each month, organized by category (food, transportation, clothes, household, entertainment, savings, etc.) This will be the broad outline of your budget — what you see on paper.
What you see in your head after this process, however, is likely to change. When you make a food purchase, it’s not merely an in-the-moment response to a hankering for a cheeseburger. Instead, your brain begins to mentally review your budget to determine if a Big Mac is the right choice or whether that money is allocated to something else.
If the CSI method seems like a headache, or if you don’t want to wait three months, try the abbreviated approach. This is when you track only what you spend on food. Most people who give it wind up being shocked at what they spend, often without even realizing it.
Whichever approach you choose, the key is to formulate a realistic household budget that lists all of your expenses and all of your income. Put your effort into putting a good budget together. We’ll take more about how to use it later.
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Email personal financial questions to aobermueller@cdapress.com