Transition to Independence

Know Your Income

It’s important to know what you have to work with each month, so include everything from your salary, interest, tips or other miscellaneous sources of income, like government assistance or child support.

Review Your Expenses

There are two types of expenses: fixed and variable. Fixed expenses are easy to plan for because they’re the same every month, like your rent or car payment. Variable expenses will fluctuate from month to month; examples are your electric, water and grocery bills. Variable expenses may be harder to plan for, but they give your budget some wiggle room.

So how do you plan for variable expenses? Using your electric bill, for example, you can either add up all the payments you’ve made over the year and divide by twelve to get your monthly average or you can budget based on the most you’ve ever spent on your electric bill in a year. Either option should give you a good base amount to start with.

Remember Less Frequent Expenses

Don’t forget about expenses that may only be due a few times a year, like magazine subscriptions, car insurance and property taxes. To help you plan for these costs, take the total due and divide by twelve if it’s an annual expense or six if it’s biannual. Then put that amount in savings so you’ll be prepared when the bill is due.

Create Expense Categories

Consider your monthly expenses and assign them to categories, such as investments and savings, mortgage or rent, insurance, home repairs, utilities, student loan payments, credit card payments, groceries, day care, transportation, entertainment, etc. Every category should apply to you; the key is making it relevant to your lifestyle. Check out our sample budget (PDF).

Track Your Spending

Not sure what expense categories to include? Try tracking your spending. For one month, keep all of your receipts and group similar expenses together. At the end of the month you should see some obvious patterns. Now that you know where your money goes, you’ll be able to make changes if necessary, prioritize your spending by wants and needs and estimate how much to spend on different areas each month. For an even clearer picture of your spending habits, track your money for three months.

Don't Forget to Save

Paying yourself should be a priority, not something you do if money is left over. Treat savings as a fixed expense, just like your rent or student loan payment. Before spending a single dollar of your paycheck, set aside a portion as savings. Don’t be discouraged if you can’t save a fortune right away. Whether you can save $10 or $100 this month, start now! You can always increase the amount later. Making savings a habit is what counts. Check out our savings growth chart (PDF) to see how fast your savings can grow.

Build a Safety Net

Now that saving is a priority, start an emergency fund. This will provide a financial cushion for unexpected expenses, like car repairs. Aim to save 10% of your income each month until you have enough money to cover a few months’ living expenses. If 10% seems impossible, start lower and work your way up. Once your safety net is in place you won’t have to rely on credit cards or payday loans in a crisis.

Tackle Credit Card Debt

A credit card can be a useful financial tool when used responsibly. However, if you’ve racked up more credit debt than you planned, stop using your credit card - save it for emergencies only. Focus on paying off your debt by always making payments on time and paying more than the minimum payment due! Check out this payoff calculator to see out how quickly you can reduce your debt by making extra payments.

Use the Debt Snowball

If you have multiple credit cards, use the debt snowball (PDF) to get rid of debt in a hurry. To save on interest payments, pay a little extra to the credit card with the highest interest rate first or, for faster satisfaction, focus on the card with the smallest balance. When one balance is fully paid, add that payment to the payment for another account. Repeat these steps until all accounts are paid in full. Then be a ‘deadbeat’ – a deadbeat is what the credit industry nicknames those who don't carry balances from month to month.

Try Paying with Cash

For a while, pay for everyday items like lunch, coffee or gum with cash. Constantly paying daily expenses with a credit or debit card may not “feel” like spending money. Handing someone your cash may make you stop and think about the importance of the purchase.

Don't Forget the Fun

Forgetting to include money for entertainment is a classic budgeting mistake. Most of us have to work to live, but don’t live to work. All budgets should allow a bit of fun and flexibility!

Don't Spend it All

There’s one thing that all financially successful people have in common; they live below their means. Don’t live paycheck to paycheck and definitely don’t rely on credit cards to make ends meet.

Use the Right Tools

Whether you’re old-school or tech-savvy, there’s a budget tool to fit your needs. Check out our budgeting module to learn more about the envelope system and online tools that can make budgeting fun and easier.