Beginners' steps in basic budgeting

Q: My parents are faithful readers of your column (I'm not because I'm in college and don't subscribe to the newspaper).

I'll graduate in May and we were talking about the task of budgeting once I'm out on my own. They said you've written about that topic in the past around the New Year. Do you plan to write about it this year and if not, could you please send me your previous columns on this subject?

A: It's a good topic anytime of the year but especially when people are taking inventory of the previous year and making New Year's resolutions.

Consider subscribing to the newspaper; it offers a lot of good advice, information and money-saving coupons. As a college student you may receive a discounted subscription. You can also review the paper, including archived columns, online at no charge by visiting www.newsobserver.com.

Back to budgeting. If you could think of budgeting as a lifestyle strategy instead of a task, you might find it more palatable. If you don't let your spending get out of control and live beneath your means (spend less than you make), you may never have to budget.

I hope the following is helpful:

STEP 1: FINANCIAL GOALS

List your financial goals and the expected costs of each. Break these out into three levels depending on the number of months or years by which you desire to reach the goal: 1) short-term (in the coming year), 2) mid-term (over the next five years), and 3) long-term (over five years away). Then prioritize the goals within each level. For example:

* Short-term Goals: Have three to six months of expenses in a liquid cash reserve account. Reduce credit card debt to nothing, pay off balance every month.

* Mid-term Goals: Purchase a new used car within three years. Save for a 20 percent down payment for a home purchase.

* Long-term Goals: Invest in a company retirement plan up to the match and then invest in a Roth IRA.

STEP 2: CASH FLOW ANALYSIS

Find out where all your money comes from and where it goes.

Gather your tax return, pay stub, check book, billing statements and other records of money flowing in and out. Identify expenses that are Fixed (have little or no flexibility such as rent and insurance) and those that are Discretionary (easily changed, such as eating out and entertainment).

Total income minus total expenses will let you know if you have a cash surplus or a cash deficit. Either way, this is something you need to know before you can develop a realistic financial plan.

STEP 3: DETERMINE YOUR NET WORTH

This is simply a listing of what you own and what you owe.

For example: If you own a car valued at $15,000 and your loan balance is $5,000, you list the car value as an asset and the outstanding loan as a liability. If this was all you owned, your net worth would be $10,000. The goal is to increase your net worth. Comparing your net worth statement year by year allows you to track your financial progress. Yearly updates allow you to adjust your spending or saving habits in a timely manner. Net worth and cash flow worksheets can be found on my Web site.

Thank your parents for reading my column, have a great new year and congratulations on your coming graduation!