Understanding personal finance is critical to succeeding in today’s world, but study after study shows that many Americans still need a better understanding of core financial concepts. Decisions about how you earn, spend and borrow money can have a lasting impact on your life. Understanding the basics of personal finance and how they apply to your unique situation is the first step to setting yourself up for financial success.
For youth and young adults just starting to embark on a lifetime of important financial decisions, budgeting is one of the most foundational financial concepts to learn about. Budgeting allows individuals to track how much money they earn and spend. Without some sort of budget, it is almost impossible to spend money in the ways you want both now and in the future.
Sometimes, when you run short of money before getting paid, you might wonder where the money has gone. One of the ways that people begin to create a budget is by keeping a record of how they spend their money. This record, called an expense statement, keeps track of how people spend their money over a certain period of time (often monthly). By knowing how you have spent your money in the recent past, you can better project how much you will need in the future.
In addition to an expense statement, if you know how much income you are earning, you can start to develop an income statement, which lists all of your income and expenses for a certain time period and can show you how much you are spending and saving (or “dissaving” if you are spending more than you earn).
When you start to budget, you look at your income statement and decide if you need to cut down on your spending or reallocate where you spend your money. For example, you may choose to spend less money on video games and start using that money to save for a new phone. Your new, desired income statement is now your budget, and your goal is to manage your spending according to your budget. This will force you to monitor how you spend your money to make sure that you are on track to meeting your financial goals.
While it is just one aspect of personal finance, understanding your budget will help inform all of the other financial decisions you will face. You can even create future budgets by projecting your estimated income and expenses to better understand the impact of taking on student loans, choosing a certain career path or even moving to a different city with a different cost of living.
April is Financial Literacy Month and is the perfect time to start exploring personal finance concepts that are new to you and share what you do know with your friends and family. The AFSA Education Foundation is a nonprofit organization that provides free personal finance resources to youth and adults. Learn more at www.afsaef.org and check out our budget planner worksheet and other tools here.
