Budgeting

Budgeting (Federal Student Aid)

The word "budget" means different things to different people.  You might think of budgeting (or "living on a budget") as living below a certain standard or not being able to afford the things you want.  On the other hand, you might think of budgeting as a tool to prioritize your spending, and to help determine and reach your financial goals.

Creating a budget means learning to choose where your money is going, rather than wondering where it all went.

What is a budget?

In its simplest form, a budget is just a summary of your income and expenses for a given period of time.  You can create a budget for a month, a quarter, or a year, depending on your needs.  A successful budget can help you identify your needs versus wants, control wasteful spending, and adapt as your financial situation changes over time.

Everyone's income, resources, and priorities are different, so budgets aren't one-size-fits-all.  Your budget should be tailored to meet your income and fit your lifestyle.

Review your income & resources

The first step in budgeting is to figure out your total income.  Income may come from a number of different sources, including your paychecks from work, contributions from parents, other support from family, and financial aid refunds.

If your parents will give you money, make a plan with them about when and how you will receive those funds, and be prepared to talk to them about what those funds will cover.  If you will receive a financial aid refund, make sure your aid refund lasts for the whole quarter.

Tip:  When starting a budget, it's a good idea to underestimate your income, rather than overestimate.  It's better to underspend and end up with a surplus.

Track your spending

Once you know how much income you have, you want to track all of your expenses in a month.  This step can be a bit time-consuming the first time you do it, but it is definitely worthwhile in helping you figure out how you currently manage your money.  If you use a debit card regularly, an easy way to start is to look at your bank account online and see how your expenses add up.  You might even be surprised when you look at a breakdown of your spending.

Your spending will generally fall into two categories:  fixed expenses and variable expenses.  Fixed expenses generally stay about the same from month to month – like your rent or your cell phone bill – and you may be locked in to those expenses or unable to negotiate/reduce them, at least for a time.  Variable expenses are those you control – like groceries, eating out, and entertainment – and they can fluctuate from month to month.  Understanding your habits will help you to figure out what your priorities are, and also help you trim unnecessary spending.

Be sure to keep in mind that some of your expenses might be "seasonal," like purchasing books at the beginning of each quarter or traveling home for breaks, so be sure to factor those into your budget so you can set aside money for them on a regular basis.

Tip:  It's a good idea to overestimate your expenses – you don't want to underestimate and end up overspending, or you'll end up with a shortfall.

Balance your budget

Once you know where all of your money is coming from and where it's going, add it all up:  What's your total income?  What are your total expenses?  What's the difference between those totals?  If your income exceeds your expenses, you should have money left over; if your expenses exceed your income, you might be going into debt.

If you have a positive balance, you shouldn't look for new ways to spend your money.  Instead, consider putting extra money into your savings.  Or, if you have a credit card balance or student loans, consider putting your extra funds toward those balances.

On the other hand, if you're over budget, you'll need to take some steps to either increase your income or rein in your spending.

Identify wants vs. needs

Look at all your spending categories.  Where might you be able to trim? Most of your fixed expenses are probably set for a while, like your rent until your current lease is up, or your cell phone bill until the end of your contract.

What about your variable spending, like groceries, clothes, eating out, or entertainment? You might find some room in those categories to cut back, since those are the ones, you should have more immediate control over.  Review your spending patterns to find small expenses that might add up to large monthly expenditures.  For example, spending $2 a day at a vending machine is $60 at the end of the month; spending $10 to eat lunch out three days a week adds up to $300 per quarter.  By packing your lunch or snack, you might be able to cut those expenses by half (or more). Decide on a reasonable limit to set for yourself in any categories where you think you can reduce your spending.

You might also find it helpful to put yourself on a weekly or monthly "allowance" to help you stick with your budget. Make sure to allow yourself a few "wants" so you don't feel deprived – living on a budget shouldn't mean that you never get to enjoy yourself.

Set your goals

The purpose of a budget is to help you meet your financial goals, both now and in the future:

• Short-Term:  0-12 months (example:  buying books next quarter, flying home for break)
• Medium-Term:  1-3 years (example:  saving up for study abroad or a vacation after graduation)
• Long-Term: 3+ years (example:  buy a car after graduation, pay off student loans)

Financial goals should always be SMART:  Specific, Measurable, Achievable, Relevant, and Time-Bound.  Goals that are too vague or long-range are harder to plan or budget for.

SMART Goal Example:

• Specific:  I want to buy a new laptop at the beginning of next school year.
• Measurable:  The computer will cost about $900.
• Achievable:  I need to save about $100 per month. I will be able to work additional hours each week to earn the extra money to help me save up.
• Relevant:  My current laptop is reaching the end of its usable life, or I need a more powerful machine for schoolwork.
• Time-Bound:  I want to make this purchase in 9 months, so I have 9 months to reach my goal.

Having a goal is important, but it's also important to make sure you know how you will reach that goal.  For example, if you need to save more money per month for an expense than you currently do, how will you accomplish that?  Can you work extra hours?  Cut back on spending somewhere?  When you make a budget, make a plan.

Avoiding the debt trap

Many people approach budgeting with this mindset: "It's not my spending that's the problem; it's my paycheck/parents/income/financial aid that's the problem."

In reality, you need to adjust your spending to live responsibly within your means. If your income is pretty fixed or you don't have options available to increase it, this means cutting your spending.  Otherwise, you might find yourself spending tomorrow's money today – putting today's shopping or fun on a credit card, and ignoring the fact that you'll have to repay it later (with interest).  That additional payment will also make your budget tighter in the future – another bill you'll have to pay – which means you might be more inclined to reach for that credit card again to afford something else, and you can quickly end up in a cycle of debt.

Credit Cards are a useful financial tool but should be used with caution, especially while you are a student. Limit your number of cards, and reserve them for real emergencies or for important purchases you know you will be able to pay off immediately.

Tips:

• When making a purchase, ask yourself, "Do I really need this?" and "How will I pay this off?" Maybe even write those questions on a sticky note and put it on your credit card, so you're reminded of them when you pull your card out.
• If you get a raise or a gift, don't immediately make plans to spend it all, or you might quickly fall into the same cycle.  Can you put some of it in savings?  Use part of it to pay off a debt?  Maybe make a deal with yourself that you're allowed to spend half and put the other half to good use.

Maintain your budget

Schedule a time to review your budget regularly, maybe once a month to start out.  This will help keep you on track, allow you to adjust based on anything you forgot to factor in, and keep you from being blindsided by an unexpected expense.  Be honest with yourself, figure out what really matters to you, forgive yourself for small mistakes, and then get back on track.

You might find different tools to be helpful in setting up and maintaining/adjusting your budget:

• Use our Personal Budgeting Worksheet
• Spreadsheets:  You can find budgeting templates online or create your own from scratch.
• Website or App:  These options offer online tools or a phone app.
• Check with your bank.  Many banks offer budgeting tools, either as part of or separately from the bank's regular app.

If you try one budgeting tool and it doesn't work for you, don't be discouraged – try something else!  If spreadsheets aren't your thing, maybe something more automated like an app would help keep you on track.

Also remember that your budget is a living thing; it's not intended to stay the same forever and should change as your life changes.  Did you get a new job or a raise?  New apartment (cheaper or pricier)?  Planning to move across the country?  Want to get a puppy?  Your budget can help you plan for and adjust around these things – just don't make any major changes or decisions without first thinking about your budget.