Smart is the New Rich - Christine Romans

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It's a loaded word, full of limitations, that we think is more suitable for older generations. But a budget is the money version of a healthy diet. Once you identify the empty calories in your budget, you'll feel better and more focused.

      A budget is simply a plan. And it's the nonnegotiable habit for growing wealth. Patrick O'Connell, executive vice president of the Ameriprise Advisor Group, works with thousands of financial advisers across the country. “The price of success is paid for in full in advance,” he tells me. Having a budget and saving money every month is paying yourself first.

      “We see many millennials interested in building wealth who have to start building the savings plan first. Pay yourself first, and work the expense base off the remainder,” O'Connell says. He likes to start with these three steps:

Three Steps to Building Your Budget

      1. Identify how you are spending money now.

      2. Evaluate your current spending and then set goals that take into account your long-term financial objectives.

      3. Trace your spending and make sure it stays within your guidelines.

      Often, we feel as though we have a general idea of how much money is coming in and going out each month. But you've got to put down on paper every penny.

      Financial expert Stephanie Genkin, a Brooklyn-based independent fee-only planner who advises millennials, says it's always possible to become a saver.

      “I worked with a young woman who had no debt but liked to treat herself to expensive new clothes and books every month. We talked about what it would be like for her to scale back on her spending in order to put away a little money each month for retirement and a rainy-day fund. I got through to her by telling her what her life might be like 10 to 20 years from now without savings. She now contributes 3 percent to her 401(k) and automates a fixed amount of her paycheck to a savings account.”

      There are helpful online tools and budget apps like www.mint.com to analyze your habits and craft a budget. Check out your bank or credit union website for tools to use for budgeting, tracking your spending, and automatically paying bills. Websites for money managers Fidelity and Ameriprise Financial have helpful tips for organizing which bills to pay. It's incredibly important to really know how much you are spending each month in every single category. Only then can you spend less than you bring in and grow the difference.

      I grew up with a frugal father, who had very simple rules about money that he often boiled down to entertaining little rhymes, one of which is the basis for every budget: “Keep your burn rate less than your earn rate.” It means spend less than you earn. The budget helps you figure out how.

      To get started, you need to ask yourself a few questions.

      • Does your income money last as long as the month?

      • Are you spending more than 28 percent of your take-home pay on housing costs?

      • If you live at home, are you saving a little each month for a deposit on an apartment?

      • Are you carrying a balance on your credit cards?

      • If so, how many months will it take to be credit card debt–free?

      • If your phone breaks, do you have money to get a new one?

      • Your best friend from childhood just announced a destination wedding. Do you have the money to make it (not to mention the bachelor/bachelorette party)?

      • If you have a job, does it offer a 401(k), and are you contributing enough to get the company match?

      • Do you have three months' living expenses handy in case of an emergency?

      Take note that I didn't even bother asking the age-old financial adviser question: At what age do you want to retire? That's because (1) it's nearly impossible for any young generation to really get their head around this question, since it's the last thing they think about; (2) forced savings plans like 401(k)s and IRAs (more on these in Chapter 8) help address the retirement issue; and (3) there are more pressing financial decisions facing millennials in the near term. Beyond the aforementioned “I have to pay for a new phone” dilemma, there are a host of other costs millennials have to prepare for, notes Ameriprise's O'Connell.

      “Buying homes, selling homes, cars, children, weddings – you name it. So think about medium term financial goals and start building momentum. The first $5,000 or whatever your goal is to accumulate is the hardest,” says O'Connell. “After you reach that first goal, it becomes easier. So you want to focus on a strong financial foundation.”

      How Much Should You Save?

      We'll more fully explore these questions, how to answer them, and how to get there in the pages ahead. Planning a budget means recognizing how far you are from these goals. You have to know what is coming in and going out before you can slot money for investments, real estate, and retirement goals. Write down every little expense – including the price of your morning bagel, change for doing laundry, the amounts for phone/Internet bills, and what you shell out for entertainment. Track your spending, make realistic goals, and be consistent. Once you're on track – with housing costs in line with what you can afford, high-interest credit card debt paid off, and student loan payments automatically paid each month – the next step is building wealth.

      Throughout human history, civilizations endured because people planned for the future by socking away a little of today's wealth for the next year. They saved some of this year's crop to plant again the next year to guarantee stability (and wealth) for coming years. Eat all your seed corn now, and you'll starve later. It sounds rather Game of Thrones, I know, but, really, unless you budget, save, and prepare, you're leaving an awful lot to luck.

      That's a bleak way of saying that Americans spend too much and save too little. On average, Americans save about 4 percent of their income each month. The savings rate has slowly improved since the Great Recession ended, but it still is not high enough. A reachable target is 10 percent, and those Fidelity 401(k) millionaires put away 14 percent on average, starting young.

      As you prepare your budget, if you can't get to 10 percent right away, start more slowly. Squeeze just 1 percent out the first month, then 2 percent the next month. Ratchet up the savings, and trim the spending bit by bit.

      “You've got to save every penny.”

– Carmelo Anthony, New York Knicks, CNN March 2012

      I often hear from readers and viewers that they don't have any money to save, that their finances are out of their control, and that until they get a better job or move to a different city or pay off their student loans, they can't save another penny.

      I always circle back to the advice from my friend and frequent CNNMoney guest Ryan Mack. He's the president of Optimum Capital Management, and he is a true believer that anyone can make a budget and find money to save in it, no matter their circumstances. His mother raised two sons with scant money, sometimes on public assistance and in public housing. She made it into the middle class, and Mack uses her example in his own business to inspire anyone to build wealth. He says wealth is built slowly and surely through the little daily decisions we make with our money. He says all of us have a responsibility to be “good stewards” of our finances. Mack explains:

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