How to start personal finances?

Question

I'm 24 years old, and haven't ever spent a second thought on money. My parents were not rich, but they had enough to keep me totally away from all business-stuff. When I was 19, I finished an apprenticeship as programmer and I worked and earned money there, but never really thought about it.

Then, I did my university entry exam, and now I'm studying. I get the German "BaFöG" (money for students), which limits how much money I can have.

Last year, after finishing the exams, I had half a year to university. And I wanted to get unemployment benefits for this time. It failed because I failed to keep all my bank account statements. Such simple things were often the problem for me.

I was very, very unorderly and never cared for money and finances. I always somehow survived and got enough for life, but never any idea into saving money for the long run or even making the money work for me in any way. The apprentice would have given me enough money for that, but as I've said, I never really cared enough to get into that.

Now, obviously, I get more and more problems (missing bank statements, not even folders with ordered documents and so on). Everything I could I assembled together, so I now do have very specific, well-ordered folders.

So, my question: What's the best way to get an ordered financial life? How to start? Just assembling documents into folders, though very useful of course, is probably just the beginning. And: how to learn that stuff?

The case I expect myself to become is that I do have some money, enough to live without worrying about it too much. And maybe, with good luck, have some of my money working for me, even if only marginally. But that's not the main point. I want to become an adult now, finally.

Answer 1

Personal finances are not intuitive for everyone, and it can be a challenge to know what to do when you haven't been taught. Congratulations on recognizing that you need to make a change.

The first step that I would recommend is what you've already done: Assemble your bank statements so you can get an accurate picture of what money you currently have. Keep organized folders so you can find your bank statements when you need them.

In addition to the bank statements for your checking and savings accounts, you also need to assess any debt that you have. Have you taken out any loans that need to be paid back? Do you have any credit card debt? Make a list of all your debts, and make sure that you have folders for these statements as well.

Hopefully, you don't have any debts. But if you are like most people, you owe money to someone, and you may even owe more money than you currently have in your bank accounts. If you have debts, fixing this problem will be one of your goals.

No matter what your debt is, you need to make sure that from now on, you don't spend more money than you take in as income. To do this, you need to make a budget.

A budget is a plan for spending your money. To get started with a budget, make a list of all the income you will receive this month. Add it up, and write that amount at the top of a page. Next, you want to make a list of all the expenses you will have this month. Some of these expenses are more or less fixed: rent, utility bills, etc. Write those down first. Some of the expenses you have more control over, such as food and entertainment. Give yourself some money to spend on each of these. You may also have some larger expenses that will happen in the future, such as a tuition or insurance payment. Allocate some money to those, so that by the time that payment comes around, you will have saved enough to pay for those expenses.

If you find that you don't have enough income to cover all of your expenses in a month, you need to either reduce your expenses somewhere or increase your income until your budget is at a point where you have money left over at the end of each month.

After you've gotten to this point, the next step is figuring out what to do with that extra money left over. This is where your goals come into play. If you have debt, I recommend that one of your first goals is to eliminate that debt as fast as possible. If you have no money saved, you should make one of your goals saving some money as an emergency fund. See the question Oversimplify it for me: the correct order of investing for some ideas on what order you should place your goals.

Doing the budget and tracking all of your spending on paper is possible, but many people find that using the right software to help you do this is much easier. I have written before on choosing budgeting software. All of the budgeting software packages I mentioned in that post are from the U.S., but many of them can successfully be used in Europe. YNAB, the program I use, even has an unofficial German users community that you might find useful.

One of the things that budgeting software will help you with is the process of reconciling your bank statements. This is where you go through the bank statement each month and compare it to your own record of spending transactions in your budget. If there are any transactions that appear in the statement that you don't have recorded, you need to figure out why. Either it is an expense that you forgot to record, or it is a charge that you did not make. Record it if it is legitimate, or dispute the expense if it is fraudulent.

For more information, look around at some of the questions tagged budget. I also recommend the book The Total Money Makeover by Dave Ramsey, which will provide more help in making a budget and getting out of debt.

Answer 2

I'm assuming you're in Germany or Europe based on your question, but here's an American's perspective that should pertain you you as well:

• There are hundreds of books on personal finance, but many of them are about getting out of bad situations or how to "get rich". Avoid those. Get something like "Personal Finance for Dummies" or a book that talks about budgets (not investments).
• Find someone you trust to coach you. A professor at your local business school, or a neighbor that seems to have survived financially, to help you answer those questions that most adults learn through experience.
• Don't take financial advice from broke people. Don't try to game your credit score, borrow money to buy things you can't afford, take out loans so you can invest, etc.
• Pay cash as much as possible (even for living expenses). You're not going to get rich earning 1% on a credit card, and there's a very likely chance that you can go broke because you've borrowed more than you can pay back.
• Develop a realistic budget for each month and try as hard as you can to stick to it. Many people just buy whatever they want and have no idea why they have no money at the end of the month.

Once you have a steady income and an emergency fund large enough to keep you from going bankrupt, then start learning about retirement and investment options.

Answer 3

There are many paths to success, but they all begin with education. You made the first big step just by visiting here. We have 17,000 questions, arranged by tag so you can view those on a given topic. You can sort by votes to see the ones that have the best member acceptance.

I'll agree with Ben that one of the best ones is "The correct order of investing." We both offered answers there, and that helps address a big chunk of your issue.

The book recommendations are fine, you'll quickly find that each author has his/her own slant or focus on a certain approach. For example, one financial celebrity (note - in the US, there are private advisors, usually with credentials of some sort, there are those who work for brokers and also offers help, there are financial bloggers (I am one), and there are those who are on the radio or TV who may or may not have any credentials) suggests that credit cards are to be avoided. The line in another answer here, "You're not going to get rich earning 1% on a credit card," is a direct quote of one such celebrity. I disputed that in my post "I got rich on credit card points!" The article is nearly 2 years old, the account accumulating the rewards has recently passed $34,000. This sum of money is more wealth than 81% of people in the world have.

The article was a bit tongue in cheek (sarcastic) but it made a point. A young person should get a credit card, a good one, with no fee, and generous rewards. Use the card to buy only what you can pay back that month. At year end, I can download all my spending. The use of the card helps, not hinders, the budgeting process, and provides a bit of safety with its guarantees and theft protection.

Your question really has multiple facets. If these answers aren't helpful enough, I suggest you ask a new question, but focus on one narrow issue. "Paying off debt" "Getting organized" "Saving" "Budgeting" all seem to be part of your one question here.

Answer 4

A few practical thoughts:

• While they are hopefully not where you need to go, there are Schuldnerberatungsstellen (debt counseling). They have information on how to successfully manage your finances (for them it is "prevention") and I imagine they'd be very happy to have a customer who comes before it is too late... They have lots of practical experience how to teach people to get an overview of their finances, and how to set up a realistic budget.

• A practical thing that helps me immensely not to loose important paperwork (such as bank statements, bills, payroll statement, all those statements you need for filing tax return, ...) is: In addition to the folder (Aktenordner) where the statements ultimately need to go I use a Hängeregistratur. There are also standing instead of hanging varieties of the same idea (may be less expensive if you buy them new - I got most of mine used): you have easy-to-add-to folders where you can just throw in e.g. the bank statement when it arrives.
  This way I give the statement a preliminary scan for anything that is obviously grossly wrong and throw it into the respective folder (Hängetasche). Every once in a while I take care of all my book-keeping, punch the statements, file them in the Aktenordner and enter them into the software.
  I used to hate and never do the filing when I tried to use Aktenordner only. I recently learned that it is well known that Aktenordner and Schnellhefter are very time consuming if you have paperwork arriving one sheet at a time.

• I've tried different accounting software (being somewhat on the nerdy side, I use gnucash), including some phone apps. Personally, I didn't like the phone apps I tried - IMHO it takes too much time to enter things, so I tend to forget it. I'm much better at asking for a sales receipt (Kassenzettel) everywhere and sticking them into a calendar at home (I also note cash payments for which I don't have a receipt as far as I recall them - the forgotten ones = difference ends up in category "hobby" as they are mostly the beer or coke after sports).
  I was also to impatient for the cloud/online solutions I tried (I use one for business, as there the archiving is guaranteed to be according to the legal requirements - but it really takes far more time than entering the records in gnucash).