Budgeting

The best way to ensure you are making good financial decisions is to create and follow through with a budget or personal spending plan. Budgeting focuses on two things: your income or how much money you have coming in and your expenses or how much you are spending.

A budget can help you determine if you can afford a new or increased expense before you buy something new or decide to move into a nicer apartment. It can also help you work towards your financial goals like saving for a new laptop or paying off your student loans.

Getting Started

Do you know where your money goes? How much have you spent today? This week? The first step to budgeting is knowing where your money goes. Keep a spending diary to track what you spend your money on and how much you typically spend. If you have a bank account and use your debit card for purchases, your bank account may have a tool to do this for you. There are also apps that do this for you or you could review your bank account transactions to determine this. Be aware that some apps also market credit cards and loans. Make sure you do your research on these offers before accepting any. If you use cash or a combination of cash and card, you can use a paper diary, an app, or a program like excel to track it over the next week or month. While you are tracking your expenses, it can be helpful to start thinking about the areas you can cut back to free up some money if you need to.

Creating a Budget

Now that you know how you spend your money, it's time to create a budget.

First, determine your income. Income is money that comes to you. This includes wages, self-employment, child support, interest, Social Security Benefits, housing assistance, or food assistance. For many students this will also include your financial aid refund check. Keep in mind that money that has to be paid back is typically not considered income so while you may be using a refund from a loan to help cover expenses, it should be your last resort. When determining your income, be sure to use your net income. Net income is the amount you receive after taxes and any other deductions are taken out. Gross income is the amount you receive prior to any deductions being taken out. Total all of your income.

Next, determine your expenses. There are two types of expenses: fixed and flexible. Fixed expenses are ones that are the same each month like your rent or car payment. Flexible expenses are ones that can change from month to month like your food expenses or your electric bill. For flexible expenses, you can use an average amount or use the highest amount. Total all of your expenses.

Now review your total income and total expenses. Are your total expenses higher than your total income? If so, you will need to reduce your expenses or increase your income. If your total expenses are lower than your income, subtract your total expenses from your total income. Put this amount in savings or use it to pay off debt.

Staying on Track

Regularly review your spending to ensure you are staying on budget. There are many options for this. A couple common ones are apps or the envelope method. An app can track your expenses and notify you when you are getting close to your budget for an expense. The envelope method involves putting cash into an envelope for expenses. For instance, put cash in an envelope for coffee and use that cash to make your coffee purchases. Once the envelope is empty, no more coffee purchases for that month.

Making Adjustments

Make adjustments to your budget as needed. Your rent may go up each year or you may pay a loan off and have more funds leftover each month to put into savings or towards paying off debt.

Determine if your expenses are needs or wants. Needs are things that are essential for you to live, work, and go to school like housing and food. Wants are things that you enjoy but would not jeopardize your health or safety to go without like Netflix and Starbucks. Some items can fall into both categories like you need shoes to protect your feet and keep you warm in the winter but you may want a pair of $150 shoes that look better than the $15 pair that would cover you need or three pairs you already have. You should include your wants in your budget but it is helpful to know what areas you can cut back or eliminate if you are over budget or if an emergency comes up. 

You may also want to save up for some expenses like those $150 shoes or textbooks at the start of each semester. If you have money left over after subtracting your expenses from income, you could take a portion to put aside each month until you have enough saved. 

Resources

Here are some free resources you can use to help you budget:

Nerd Wallet's Free Budget Worksheet

Mint is a free app that you can link your bank and credit card accounts to in order to track spending. Mint also has a budget tool. This app also markets credit cards and loans. Do your research before accepting any offer.