The whole idea of budgeting elicits an entire range of responses.  Some people live and die by the budget, tracking every tenth of a penny and not budging from their pre-set spending limits.  Others completely hate the idea of keeping a budget and feel it’s a waste of time.  I’ve been on both extremes and everywhere in between on my budgeting journey.  At the end, I realized there are 3 principles for a successful budget.  Read on and I will also tell you what specific budgeting software worked for me.

I did what most budgeting articles and software usually tell you to do.  I looked at my previous spending, set up some categories and estimated how much I “should” be spending.  The problem was that once I went over in a category (sometimes WAY over), I became disheartened and again thought budgeting wasn’t for me.  I went back to just charging what I needed, while telling myself in vague terms that I “shouldn’t” be spending this much on food.

After a few months of this, I tried a new system and found it actually worked!  It was a change in thinking from traditional budgeting.  I started using the software and things just came together and made sense.  Plus it didn’t feel like a chore to sit down and enter transactions or set up my spending categories.  After going on this budgeting journey, I narrowed down what I think are 3 essential steps to successful budgeting:

Find what system works for YOU.  There are so many different ways to budget out there.  Some people prefer old school methods like keeping a notebook and pen with you, or separating all of your cash into envelopes with different categories.  Others are a little more high tech and prefer an Excel spreadsheet or Quicken software.  Online budgeting through sites such as Mint or BudgetTracker are popular nowadays, as you can work through the cloud and upload your transactions easily.  The key is to find out which medium you think will work for you and just try it out.

Don’t get discouraged.  Budgeting at its best as an imperfect tool.  It requires you to set up different categories of spending and set limits based on your previous spending or estimated upcoming spending.  The fact that you are estimating how much you will spend invariably means you will get it wrong.  Family and friends come over, cars need maintenance and accidents happen.  It is important not to get discouraged if you deviate from your estimates because the fact is no one gets them exactly right.  A good budget will allow you to be flexible and adjust your limits as the situation changes.  I believe this is the main reason people quit budgeting.

Make it as automatic as possible.  The first few months of any budget will be a learning experience.  It will feel clunky and even frustrating at times, but it should become more and more intuitive.  Humans do best when our tasks are as automated as possible, and budgeting is no exception.  Finding a program that makes it easy to enter transactions and allows you to adjust your spending on the fly is essential to keep that budgeting energy flowing.

I finally did find a program that has these three essential characteristics and then some.  It has made budgeting really easy and intuitive.  I started about a month ago and have never looked back.  The program I prefer to use is YouNeedABudget, or YNAB.  The primary thing about YNAB I liked right off the bat is that it told you to forget your past spending and just worry about the present.  This avoids the hassle or poring through past credit card statements and feeling guilty about what you’ve spent.  It essentially represents a fresh start to your finances.

It is also very easy to manage your transactions on your computer and your smartphone.  This helps making things automatic, as you can just enter transactions on the go with your smartphone and not have to worry about receipts piling up.  Their website has very useful info to get started and  you can use the full software for a full month before purchasing.  After trying nearly every budgeting tool out there, this has really worked for me.

Please leave a comment below on your budgeting experiences and what works or doesn’t work for you.  Happy budgeting!

One things I really like about knowing your net worth is how clear it makes the current state of your finances and how many different ways you can improve it.  It is essentially a live autopsy of your financial health, and with the information on hand you can determine where to make changes in your life.

Just like any good football team, it is essential to have a strong offense and defense.  Being too strong in one aspect over the other usually will not produce good results.  You can look at the value of your assets as your offense and the value of your liabilities as your defense.  If you have a healthy amount of assets but some high interest credit card and student loan debt keeping the amount of your liabilities high, that is a less stable position to be in than having a little less in assets but cutting out the credit card debt.  By looking at your net worth, you can see how a combination of making a little more money to increase your assets and getting rid of a little more debt to decrease your liability can make a big difference in the long run.

When some people find the value of their net worth, based on a number of psychological biases and assumptions, they try to decide of their net worth value is “good or bad”.  As I mentioned in my last post, the absolute value of your initial net worth is not important.  In fact, that number doesn’t mean too much because a couple who is just out of school will most likely have a high negative net worth while a child with five bucks in his pocket has a positive net worth.  Obviously the highly educated couple is in a better position to increase their net worth for the long term than the child currently is.  What is important is to keep your net worth going up consistently.

As a final point, most people who graduate any type of professional school, myself included, will most likely have a large negative net worth.  The combination of high student loan balances and being in the early stage of your earning career will likely push some net worth’s into the negative six digits.  While this may be discouraging to see, it is important to know that by paying off high interest student loans first and starting to make some real money, that net worth value will start to grow quickly.  As an example, my net worth upon graduating 4 years ago was around -$150,000.  That looks like a big hole but in just 4 years my current net worth is now -$90,000.  By optimizing my income potential and paying off high interest student loan debt, my net worth increased $60,000 in 4 years.  My goal is to break even (a whopping net worth of 0!) in about 5 years.

The power of paying off student loan balances and using that extra money to pay off your next balance is very potent in increasing your net worth.  I will discuss different student loan payment strategies and how to find the right one for you in future posts.

There are many metrics you can use to determine your financial health.  You can track the amount of money you have currently in your checking account, the money in your savings account or a combination of both.  You can also track the amount of money in any investment accounts, the amount of student loan debt or even the value of your car and house.  All of these numbers can be useful and people put more emphasis on some over others.  The number I believe is most useful, however, is your net worth, which is a combination of everything.

What is a net worth anyway?  Definitions vary depending on who you ask, but the basic definition is that your net worth equals the value of your assets minus the value of your liabilities.  Now there is some disagreement on what makes up an asset or a liability.  Is the equity of your house an asset or is your mortgage a liability?  Should your house even be in the equation because you can’t really tap the value until you sell or take out a home equity loan?  Should the value of your car be included since it is always depreciating in value?  Should your small business expenses be included?  The list can go on and there are calculators such as this that can guide you: http://www.bankrate.com/calculators/smart-spending/personal-net-worth-calculator.aspx

Personally I include checking accounts, savings accounts, and investment accounts as my assets, and credit card debt and student loan debt as my liabilities.  I believe this is an easy and effective way to see how you’re doing financially.  While it can be fun (or frustrating) trying to figure out what is an asset or not, I don’t believe the details are really that important.  What is important regarding net worth is that you use it consistently from month to month to track how you are doing financially.  If your net worth is consistently going up over a 6 month period, that is a sign that you’re moving in a positive direction.  If your net worth is going down consistently, that might be a sign to examine it more closely and see what changes you can make.  What’s important is that you use it as a barometer to see how you’re doing compared to last month, and decide to stay the current course or adjust.

Now that we know what a net worth is and how it can be calculated, in my next post I’ll go over how we can harness this knowledge to produce an actual change in our finances.