So you have a budget, it shows you have discretionary money and you want to figure out how to divide it.

Well, here’s what you do:

1. Pay yourself first! Take a small portion and put it into a retirement account and/or a high yield savings account. Redefine this contribution as MANDATORY, to force yourself to do it. Even at low interest rates, the earlier you put away money, the bigger it will grow. I’ll redo future value of money next week.
2. Pay extra on your debts. Again, redefine this as MANDATORY. Come back tomorrow for more.
3. Leave the rest for unexpected needs.

With payroll deductions and direct deposit, this is very easy for me to do. After all deductions, I net about $1200 per month. Of this, about $900 (including some extra to debt) goes to mandatory expenses, leaving $300 in discretionary spending. Of this, $40 per month is being directed to other accounts for other purposes before it even reaches my checking account. $10 is going to fund the Roth IRA I just opened at ShareBuilder (referral link, you get $25 and I get 5 free automatic investments, e-mail or comment if you want a link sent to you). $10 is going to my high-yield savings account for emergency funding. $10 is going to my very low yield savings account, in preparation for adding to my Lending Club account. And $10 is going to my regular ShareBuilder account. This leaves me with $260 in discretionary spending, of which I plan on using a small portion to purchase a pair of shoes that fit me properly (foot size is US 10.5 EEEE). This is only about 90-95% of my potential take-home pay. I have 4% taken out for my 403(b) and a bit taken out for insurance premiums and beneflex.

On Sunday, I pointed out that if you know yourself, you can ask three critical questions about any purchase you want to make. This leads to the second fundamental piece of financial understanding: Budgeting.

In general, budgeting is the allotment of a limited resources for specific purposes. Whether or not your realize it, you budget time every day. You know when you have to be to work, class, appointments, etc. and you know how long it will take to get between them. With this information in hand, you then budget time for additional tasks, according to your current schedule. Budgeting with money has only one difference from a schedule, it’s money rather than time.

When you budget your money, you schedule money based 3 basic categories: Income, Mandatory Expenses and Discretionary Expenses, all of which can be broken down further based on somewhat personal preferences. Here’s what’s included in these categories:

• Income - Any money you receive, whether salary, simple gifts or windfalls.
• Mandatory Expenses - Any money you MUST pay, such as various loan payments and taxes (if you count take-home pay, these are already paid for). If this category equals or exceeds salary income, you should consider a second or better paying job.
• Discretionary Expenses - Any money left after covering mandatory expenses. This money can be spent for pretty much anything, but some of it should be considered for use towards debts, emergency funds and retirement.

Budgeting money does not necessarily have to happen on a month to month basis, it can be day-to-day, week-to-week or any consistent period. The best approach is to do a major budget once a year for estimates and then month-to-month to allow changes and adjustments as necessary.

I’ll admit that I don’t budget in the most efficient manner, since I budget about every 2 weeks and micro-budget almost daily. This micro-budgeting can also be called micro-managing my finances. I do this because I have yet to pad my checking account, which will prevent me from transferring funds from my overdraft protection or causing an overdraft due to insufficient funds in overdraft protection.

The core piece of knowledge that defines your financial understanding is: Know Thyself.

To know yourself when it comes to money, you can then ask yourself the critical questions of:

• Do I need this?
• Can I afford to purchase it?
• Is it a life dependent need?

If you ever answer ‘no’ to any two questions, don’t buy it.

As an example, I was looking at a new Nissan Versa in December. All in all, a very good deal was on the table. The only problem with it was the “For Life” program, which would have required me to have all repairs at the dealership. This part made the deal affordable, but I knew I wouldn’t use it since my uncles own a shop and I take my car there for servicing. This car was a want that I could not afford and I told the sales person that I could not justify it at the time.