Financial Literacy and Budgeting (2024)

• Take an honest look at how much you earn and where your money goes.
• Plan to put what you earn toward the things that matter most to you, while making sure you can afford the essentials, like rent/mortgage, car payments, insurance, and so on.

• Think beyond your next paycheck. Save for future wants and needs.
• Set money aside for unexpected costs and emergencies.

• Spend money wisely and consciously, keeping your budget in mind.

• Select investments that are beneficial to your financial growth and security.

• Understand the terms fully before borrowing money.
• Have a plan in place to pay off any debt—and stick to it!
• Set a deadline for yourself to have your debt paid off, and allocate money each month toward repayment.

• Earn and save money to build a solid financial foundation.
• Prioritize security and avoid identity theft and fraud.

Budgeting is a proactive approach to organizing your finances. A budget tracks what you earn and what you spend and ensures you have more money coming in than you have going out. This allows you to cover the costs of living, to afford the things that are important to you, and to plan toward short- and long-term goals.

You can use this Make a Budget worksheet, published by the Federal Trade Commission, to help guide you.

Determine your income by reviewing your paystubs and see how much you’re earning each biweekly or monthly period.

Be sure to consider if your pay varies from one pay period to the next, for example if your pay includes commissions or tips, or if your hours may vary from week to week. How much can you reliably expect to have coming in?

When in doubt, budget conservatively; it’s better to have a little extra, that you hadn’t counted on, than to come up short!

Know the Difference: Gross Pay vs. Net Pay

Gross pay is the total amount of money you earn before any deductions are taken out. Your gross pay equals your hourly pay rate, multiplied by the number of hours you work in a given period of time.

Net pay, also called take-home pay, is the amount of money you receive after all deductions are taken out.

There are numerous deductions that are applied to your gross pay. These usually include federal income tax, Social Security, and Medicare, and may also include things like premiums for health insurance, retirement contributions, or state income tax.

Track where your money goes on a weekly or biweekly basis. How much are you spending, on what, and how often? Opening a checking and/or savings account can make this much easier.

Fixed or Flexible: Which Is It?

Fixed spending consists of costs that occur regularly (once a week/month/year/et cetera). The amounts usually don’t change much from one to the next.

Examples: rent/mortgage; cell phone bills; streaming subscriptions; auto/renter’s/homeowner’s insurance; car payments; utilities; childcare; loan payments

Flexible spending, on the other hand, may change regularly and can be directly influenced by the choices you make on a day-to-day basis.

Examples: groceries; gasoline; eating out; home repairs; clothing; entertainment; personal care

Your budget should prioritize your needs first and your wants second. Expenses should be less than or equal to your total income, that is, your net pay.

If your income isn’t enough to cover all your expenses, adjust your spending by deciding which expenses you can reduce.

Most of us are familiar with the concept of borrowing money: You want to pay for something, but you don’t currently have the money to afford it, so you ask someone to let you borrow money. They provide you with the money so that you can afford it, with an agreement to pay it back in the future.

Borrowing lets people afford things they wouldn’t otherwise be able to, by providing them with the money they need upfront and offering the option to pay for it over time. This applies to things like car loans, credit cards, mortgages, and student loans.

The word debt often has negative connotations, but debt isn’t (inherently) bad; it’s just misunderstood. Debt simply means owing someone money, with an agreement to pay the amount that’s owed. Consider this: When you work, your employer is in debt to you until they pay you the wages you’ve earned. Debt isn’t the problem—runaway debt is.

You can avoid the stress of runaway debt by being smart about how you borrow and repay money you owe.

The Consumer Financial Protection Bureau, part of the Federal Trade Commission, regulates financial aid lenders, educates student borrowers, and protects against predatory lending and collection practices.