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Being mindful of where your hard-earned dollars go requires you to spend within your means. It is important not to spend more money than you earn. Budgeting allows you to track your expenses and income, helping you prioritize and save for financial goals. While not always glamorous, budgeting can keep you financially unburdened by unnecessary debts.
What is a Budget?
Budgeting allows you to effectively manage and take control of your finances by allocating funds to specific categories. Your spending decisions, timing, and method not only affect your current financial situation but also impact your future. With a budget, you can plan for essential expenses, have some fun, and prepare for the future. While you're in school or transitioning into your career, creating a budget and understanding personal finance can alleviate financial strain by aligning your needs, wants, and goals.
Wants vs Needs
Before creating a budget, you should understand the difference between needs and wants. A need is a requirement or an essential for you to live and work. Your needs are likely to take up a large portion of your monthly paycheck. Before you begin budgeting, realize that some expenses are required of you, such as a rent or mortgage payment, transportation, utilities, insurance, food, phone and internet bills.
Your wants make your life easier but are not required. Wants make life more comfortable. Eating food is a need but getting an expensive coffee every morning is more of a want. Wants are usually easy to swap out with less costly alternatives:
| Gym membership | Online workout videos or going for a run outside |
| Week-long vacations | Local weekend get-aways |
| Concert tickets | Free summer concerts at the local park |
| Eating out/food delivery | Look up online cooking recipes or videos and follow along in the kitchen |
| Designer clothing | Shop sales, consignment shops, or thrift stores |
| Luxury cars | Use a bike, motorized scooter, ride share or public transportation |
Needs and wants are going to be based on your personal circumstances.
Creating a Budget
Beginning a budget from scratch can seem overwhelming, but it will set you up for success. Before you decide on a specific budget, you should write down all the sources of money you are bringing in each month. Budgeting allows you to make your money work for you.
As a student, you will have money that comes and goes on a monthly basis, a semester basis, or even a yearly basis. You may need to divide those costs over a monthly basis for an accurate picture of where you can save and where you can spend.
1. Identify Your Sources of Income
No matter if you are budgeting for the first time or if you are looking to re-work your budget, you should begin by identifying and recording your sources of income. This income could be the money from your paycheck, the amount of money you receive from your parents, or even the amount you are receiving from your side hustle. Whatever money you are bringing into your account each month, this is classified as an income source.
For some, you may not have a monthly source of income. You may be budgeting the funds you received from financial aid for an entire semester. This is a common situation for many students, and if you find yourself in this situation it is crucial that you set a budget to help manage your money. Did you know more than 60% of students reported they ran out of money before the end of their semester at some point in their college career? It’s important to determine the best way to break down your funds monthly while knowing that there could be a few months that are slightly more expensive than others. For example, you may need to budget for travel home at the end of the semester, so the added cost of gas or airplane fares will make that month more expensive.
2. Track Your Spending
Now that you know how much income you earn, you need to start recording your spending. If you have a bank statement, you can print out the statements from the last three months to get an idea of what you typically spend on average. Or if you’re lucky, your bank may offer a spend tracking tool through their mobile app or in your online portal. These trackers will automatically categorize and give you the option to edit transactions to make sure your tracking is accurate.
If you do not have access to your month-to-month spending report, you may want to begin tracking your spending by recording every purchase you make in a log of some sort. You can do this in a spreadsheet on your computer, on a file on your phone, or even an app specifically for recording your spending.
After you have a month’s worth of expenses recorded, review your spending. Identify each transaction as a fixed or variable expense.
Fixed expenses
Fixed expenses are costs that you expect to pay each month. Your amount for each fixed expense will be the same each month, semester, or year. You may have some of the following fixed expenses:
- Tuition (usually paid at the beginning of the semester)
- Rent or housing costs
- Insurance
- Phone bill
- Utilities (sewer, garbage, water, electricity, gas)
- Internet
- Cable
- Monthly subscriptions
- Monthly medications
These expected costs can be needed expenses, but they also may be wants.
Debt
Debts are money that you have borrowed and now have an obligation to repay. obligations you have to repay borrowed money. Recording your debts can help you create a full picture of where you are from a financial standpoint. Common debts may be:
- Car payments
- Credit card
- Student loan
- Personal loan
- Mortgage (house loan)
These debts may be long term and some loans may have large interest rates. Continually working to pay down your debts, paying more towards the principal each month so you can help pay the debt off quicker and ultimately be cheaper.
Variable Expenses
Variable expenses are costs that are a little more difficult to predict. Often variable expenses happen daily or are not as structured and planned out as your fixed expenses. These amounts change month to month. Example variable expenses for a college student may be:
- Groceries
- Gas
- Personal care (salon or barber visits)
- Eating out
- Books
- Entertainment
- Fun money
3. Set Financial Goals
As a student, you may be learning the art of managing your money for the first time. While there are many directions for your dollars to be spent, it’s a good idea to set aside a little each month to go towards financial goals. You can set aside money for both long- and short-term financial goals.
In college, a short-term financial goal might be a goal you are trying to reach in the next three years, while a long-term financial goal is typically going to be a little further out—five years, ten years, or longer!
A useful short-term goal is to begin building an emergency fund. It’s a great idea to do your best to plan for the unforeseeable so you aren’t caught off guard. Having a small amount of money to cover unexpected expenses will ensure you are ready to handle any situation that may arise. You may want to begin with $100 to cover small unplanned expenses, such as a trip to the doctor’s office or a parking ticket. If you have the means, work to have $500 in your emergency fund.
Longer term goals may be paying off your student loans or saving for a down payment for a house.
4. Adjust and Review Your Budget Regularly
Once you have a good understanding of your money and financial situation, you should review your budget regularly—and be ready to adjust your budget as needed. Remember how we mentioned the idea of needs versus wants, well you may notice some extra wants you are willing to cut down out if it will help your overall financial situation. If you are new to budgeting, you may want to look over your spending on a weekly basis to help you stay on track to reach all your financial goals!
Choose a Budget Plan
Your income, your spending, and your financial goals are all individual to you, so choosing how to budget your money will also be dependent on you. Here are some ideas of possible popular budgeting plans to help you.
Envelope Budgeting System
Create an envelope for each of your budget categories and withdraw cash for each of your budget categories. Set each category with a spending limit and the appropriate amount of cash. When the money is gone, you either have to choose to use cash from other categories or to go without. This is a very disciplined system and can be helpful if you’re looking to clean up your spending habits. If you’re not comfortable having large amounts of cash on hand, there are some apps which allocate your money digitally such as Goodbudget, Mvelopes, and SimpleBudget.
50/30/20 Budget
If your budget tends to be a bit more fluid or the thought of tracking every expense intimidates you, you may want to look into the 50/30/20 budget system. This system works best when you understand the difference between your needs and your wants. It breaks down your expenses into three categories:
- 50% is for necessary expenses
- 30% is for wants or discretionary expenses
- 20% is for savings and debt payments
If you have a lot of debt or a large savings goal, you may want to change the percentage breakdown. This method is easily tailorable to your needs.
Pay-Yourself-First Budget
As a student, you may be keenly aware of the student loan payments that await you on the other side of graduation. Using the pay-yourself-first budget you can prioritize your savings and debt repayment. The idea behind this method is to first pay off your debts or place money in your savings account before spending the rest of your money for the month.
Many employers or your bank will allow you to set up an auto pay to put a pre-set amount of money into a specific account each month. By having your savings or debt payments come out first, the lure of spending that money elsewhere is diminished. Placing your debts (or savings) at the top of your monthly budget allows you to take care of it before anything else. This is ideal if you struggle with repaying your debts or desire to create a savings account.