In this lesson, you will learn about important tools to help you build wealth:

• Track expenses.
• Make a budget.
• Get a handle on income and expenses.

Budgeting helps doers like Betty to:

• Understand where her money goes.
• Avoid overspending.
• Find money for saving and investing to build her wealth.

Track Day-to-Day Spending

Lynne, the dreamer, realized that to create wealth she had to become more of a doer, like Betty. She set a goal to save $125 a month to put toward her wealth-creation goals.

To start, Lynne looked at her finances to see how much money she made and how she was spending it.

Lynne needs to track her daily expenses so she can find out where her money is going.

Lynne needs to track her daily expenses so she can find out where her money is going.

Lynne needs to track her daily expenses so she can find out where her money is going.

Lynne needs to track her daily expenses so she can find out where her money is going.

Here is a page from Lynne's notebook:

• Lynne's Day-to-Day Spending

• 1/2

  Coffee

  $

  1.90

• 1/2

  Lunch

  $

  6.75

• 1/2

  Gas for car

  $

  46.00

• 1/3

  Groceries

  $

  50.00

• 1/3

  Dinner

  $

  15.00

• 1/4

  Trip to the movies

  $

  15.00

Tracking your spending is an important first step to budgeting. Seeing where your money is going now will help you see where you need to make changes and start building wealth.

Get a Handle on Income and Expenses

Lynne used the information from tracking her day-to-day expenses to develop a monthly budget. When Lynne reviewed her budget, she realized she was spending more than she earned each month.

This means Lynne was building debt, not wealth.

Lynne needs to increase her income and/or decrease her expenses.

• Lynne's Monthly Budget

• INCOME

• Take-home pay

  $

  2,300

• Total income

  $

  2,300

• EXPENSES

• Rent

  $

  700

• Utilities

  $

  100

• Cable TV

  $

  100

• Credit card payment

  $

  100

• Groceries

  $

  200

• Clothing

  $

  130

• Car payment

  $

  350

• Gas for car

  $

  150

• Entertainment

  $

  500

• Misc.

  $

  100

• Total expenses

  $

  2,430

• Total income - total expenses =

• Monthly net

  $

  -130

• Available to save or invest

  $

  0

Lynne needs to increase her income and/or decrease her expenses.

Lynne needs to increase her income and/or decrease her expenses.

Lynne needs to increase her income and/or decrease her expenses.

Here are the changes to Lynne's budget:

• Lynne's Monthly Budget

• Overtime pay

  $

  50

• Cable TV

  $

  -20

• Clothing

  $

  -30

• Gas for car

  $

  -30

• Entertainment

  $

  -125

• Spending changes

  $

  -255

Lynne's monthly budget after she makes her changes:

• Lynne's Monthly Budget

• INCOME

• Take-home pay

  $

  2,300

• Overtime pay

  $

  50

• Total income

  $

  2,350

• EXPENSES

• Rent

  $

  700

• Utilities

  $

  100

• Cable TV

  $

  80

• Credit card payment

  $

  100

• Groceries

  $

  200

• Clothing

  $

  100

• Car payment

  $

  350

• Gas for car

  $

  120

• Entertainment

  $

  375

• Misc.

  $

  100

• Total expenses

  $

  2,225

• Total income - total expenses =

• Monthly net

  $

  125

• Available to save or invest

  $

  125

Tracking her expenses paid off. By making some changes, Lynne was able to successfully develop a budget that enables her to save $125 each month.

She now has $125 a month that she can:

• Put in a savings account.
• Invest in a 401(k) retirement plan at work.
• Invest in an individual retirement account (IRA).
• Invest in stocks, bonds or mutual funds.
• Use to pay off debt.

Using Lynne's budget as an example, identify changes you can make to increase your income or decrease your expenses, and develop a new budget that includes more savings.

Be sure to make reasonable budget changes that you can live with month to month.

To help you maintain the discipline to save:

• Save every month.
• Have savings automatically deducted from your paycheck or checking account.
• Base your budget on what's left.

In other words, get on automatic pilot and stay there.

Lessons Learned

In this lesson, you learned:

• How to track your spending and review your spending habits.
• How to get a handle on income and expenses through monthly budgeting.

You have now successfully budgeted to save. The next step is saving and investing.

For an expanded version of the monthly budget tool, visit www.dallasfed.org.