Mastering your money can feel daunting when you are just starting to learn about personal finance, which is why we want to discuss the importance of tracking your money for Financial Literacy Month.
But why focus on tracking your money? It is simple: If you know how much money you make, spend, and save, you have everything needed to master your money habits and change your financial future! So, without further ado, let's dive in.
Tracking and budgeting are one and the same
When you first start learning about personal finance, many buzzwords will pop up. However, the most important of them is budgeting, which refers to the act of tracking your monthly cash flow with a goal in mind.
For some, budgeting serves a larger pursuit, such as having money left each month to pay off debt or save for retirement. To others, budgeting is a way to ensure they don't overspend. Regardless of your goal, budgeting is the foundation of personal finance mastery.
So, before moving on to the next section, it would be helpful to think about your "why" that will keep you motivated as you aim to master your budget.
How to track your spending
The first step of tracking your spending is gathering your paystubs and bank statements. While plenty of services, such as Mint, will automate this process for you, it is helpful to understand how tracking works before utilizing a service that does it for you automatically.
Once your documents are in order, create a list on a digital spreadsheet or physical piece of paper that tracks income on the left and expenses on the right. (For this exercise, ongoing monthly saving counts as an expense.)
Anything on the left side of your chart is known as a credit, meaning it increases your cash reserves. Meanwhile, anything on the right side is a debit, which decreases your cash reserves.
Once you have logged your monthly income and expenses, tally up each to determine your total credits and debits. Then subtract your total debits from your total credits.
If the resulting number is positive, you spent less than you made. However, if the number is negative, the reverse is true, and you overspent for the month.
Strive for cash flow positive
As a base goal, you should always strive to have more credits (i.e., income) than debits (i.e., expenses) to stay cash flow positive.
If you currently spend more than you make, it is imperative to modify your habits and decrease spending on things that are not essential while also increasing your income, if possible, to close the gap.
However, life is unpredictable, and sometimes you must spend more than you make during an emergency.
Therefore, it is essential to set aside cash monthly for emergencies when you embark on your financial journey.
While many experts have differing opinions on how much money to put in an emergency fund, most agree that three to six months of your take-home pay is a great starting place.
Budgeting to build an emergency fund
Initially, you likely will not have any money for emergencies, which is understandable, as most Americans are in the same situation.
However, now that you understand your spending habits, you should use this knowledge to create a budget that allows you to set aside money each month to start building an emergency fund. If you have never made a formal budget, we suggest reading our Budgeting For Beginners blog post here.
At first, spending less than you make may seem challenging, but with time you will learn to prioritize your money towards the things that matter most to achieve even bigger goals!
Looking beyond your emergency fund
Once you have saved up an emergency fund, you can use your monthly surplus to fund your other objectives, such as saving for retirement, buying a car, or getting out of debt. What you choose is up to you, and with time you will only become better at managing your money!
Do you feel like you need help?
At Lundeen Abrams Advisors, we are here to help. Whether you are just beginning your journey toward retirement or are nearly there, we regularly work with clients of various levels of financial knowledge to help them make their dreams a reality. If you need help with your financial plan or help to understand your finances, please contact us to schedule a consultation.
We will look forward to meeting with you soon!