How to balance a checkbook
Edit: Follow-up post here.
Reblubbing because this is a pretty decent and very simple intro to budgeting which doesn’t require you to develop a complex spreadsheet and mono-maniacally track every single transaction for years (unless you are like me and would do that as an enjoyable hobby).
For anyone having trouble with reading from the images, it breaks down thusly (this is a condensed interpretation not an exact transcript):
- it’s important to balance your checkbook so that you can cover your monthly expenses without encountering expensive overdraft fees (because your bank will let you take money out of your account that you don’t even have and will charge you for it, funtimes) (also “balanced” means you aren’t spending more money than you get, that’s all)
- to figure out how to balance your monthly income/expenses, do this:
- 1. Use your debit card not your credit card (credits cards are useful, but they are credit not money and will make things more complicated by adding in extra steps while you sort out balancing your budget. Use credit cards later once you’ve got this down. Debit also makes it easier to track your purchases than cash unless you are hanging onto every receipt.)
- 2. Set up your bills on autopay, either through your bank or through the service providers (this is EVERYTHING that is a bill—rent or mortgage, utilities, phone, internet, loan repayments, child support, etc. And your credit card bill if you are using credit cards. That’s why credit cards will make more work at this stage—they are an expense NOT income.)
- 3. Take a month and cut back all unnecessary spending as much as you can. The point is not to torture yourself but to give yourself a baseline of what you actually HAVE to spend in order to get through the month and what is left over. (If weird emergency expenses come up in that month, deal with it and then try to figure out what you would have had left over if that hadn’t happened)
- 4. At the end of the month, figure out how much is left over. If there’s nothing left over, you probably need to figure out how to reduce your bills more or increase your income or both and if you cannot do either of those things then you are in a bind beyond what basic budgeting can deal with. Yayyy poverty in a capitalist system. :( I’m sorry and it’s not your fault. Also, if you can use debit, this is where knowing EXACTLY where your money went comes in handy because it helps you figure out where to pare down. If you had to use cash, then make sure you kept all your receipts to go over.
- 5. Assuming you do have money left over, put as much as you can into an emergency savings account until you build up enough to cover those random emergency expenses (or, if you are ambitious, enough to cover your essentials for a few months in case you lose your job or ability to work). After you’ve built up a buffer fund, then from there on in, use some of that money to keep adding to your savings (the guide says “half”, which is a good idea especially if you don’t earn much—the more savings the better, tbh, but I’ve seen 20% recommended as the minimum to set aside),and with the rest…
- 6. Use whatever is left over as your fun spending money for the next month. As long as your expenses and income are relatively stable and predictable, you should be able to be confident that at the end of the month your bills will get paid and you won’t be going into expensive overdraft.
Another tip from me is if you have UNSTABLE income (seasonal or otherwise unpredictable) then you need to do a bit more work. Either figure out your expenses during one of your leanest months (safest approach) and then whatever extra you get in the good months is bonus savings (maybe toward a special big purchase?), or, if you are feeling riskier, then try to work out an average between the lean and the good months and build up a buffer during the high times that you can rely on when things slow down.
Also, when you ARE using a credit card (which is a good idea in order to get some kind of credit history so that you can be approved for larger loans when you need them later), some ways to do this in a manner that doesn’t get out of control is:
- Get the card and don’t use it because just having it will help start establishing your history. There shouldn’t be any penalties for inactivity, though check with your provider just in case. This is the best bet for someone who doesn’t have a regular income. My first credit card was something I got so I could go on a trip and have it as a back-up option for expenses—I didn’t use it regularly for years after that.
- Once you’ve got a consistent income, use the card regularly but always pay it off in full at the end of the month. If there are rewards on the card, then you can get a small advantage you wouldn’t from straight debit or cash transactions. But don’t use the full limit of your card each time—I’ve read somewhere that you aren’t supposed to be using more than 30-50% of your credit regularly in order to have a decent credit score. That shit is more complicated than alchemy so I’m not totally sure, but you definitely don’t get brownie points for using your full limit every time.
- For the even more stout-hearted, use the card regularly but occasionally pay slightly less than the full amount in order to accrue some interest. I suggest this only because my sister ran into a problem where basically because the bank NEVER made any money off of her card, they wouldn’t approve her for a credit limit increase when she needed a new computer. It’s surreal but it does happen. I deliberately paid some interest a few times years and years ago (less than $10 worth) and I keep getting pre-approved for ridiculous limit increases (which I mostly ignore because credit isn’t money—it’s just a relatively flexible expense) because who even knows.
- ALWAYS PAY YOUR MINIMUM. You don’t have to pay the full amount if you want to tease your lender into thinking they can make money off of you, but if you fail to pay your minimum (usually a small fraction of what you owe in total), you will torpedo your credit rating right there.
- If this sounds complicated that’s because it is and credit cards are designed to make you bad with money while simultaneously punishing you for being bad with money because that’s how they make credit card companies wealthy. :/ Anyway, you can also build a credit history instead by taking out a small short-term loan (by small I mean in the $1000 range probably? Banks will have a limit on how small they’ll actually deal with, but enough to buy a new laptop or something or a car loan is also a popular choice), getting as low an interest rate on it as you can, and paying it off in full and without missing a minimum. The “history” part of a credit history really counts, so doing this early is a great idea, especially if you’re young enough to have a parent co-sign which can get you a lower interest rate (assuming they have decent credit scores).