It seems to be the one item
that is so-o-o necessary within every individual’s or family’s financial life,
and yet, it’s the one thing that very few people actually put into
operation. What is it? A budget!
What is a budget and why is it
important?
What is a budget? Well, what it is NOT is a mysterious, secretive financial operation that is
very difficult to understand or complicated to put into practice. What a budget IS is really a simple understanding of your financial
condition and what you can and cannot do within the boundaries of that
budget. Simply put, a budget is an
itemized summary of likely income and expenses for a given period. It
helps you determine whether you can grab that bite to eat or should head home
for a bowl of soup. It is typically created using a spreadsheet, and it
provides a concrete, organized, and easily understood breakdown of how much
money you have coming in and how much you are letting go. It’s an
invaluable tool to help you prioritize your spending and manage your money—no
matter how much or how little you have.
Planning and monitoring your budget will
help you identify wasteful expenditures, adapt quickly as your financial
situation changes, and achieve your financial goals. When you
actually see the breakdown of your expenses, you may be surprised by what you
find; this process is essential to fully grasping how things can add up.
Creating a budget will decrease your stress levels because, with a
budget, there are no surprises. Unexpected car problems or medical
bills? That dream vacation your best friends are planning? With a
budget, you don’t have to panic or wonder if you have the money—you already
know. This sense of financial clarity is important not only in college, but
throughout life.
How do I create a budget?
Step 1 What are my goals?
The first step in creating a budget is to
set your goals. What are your financial goals? Do you have debts you need
to pay off? Do you want to minimize the debt you graduate with? Are
you trying to save for a car, a vacation, or your future? What do
want to accomplish while you are in school and when you graduate? Budgeting
involves tough choices, but having a goal will make budgeting
a little less painful and allows you to start planning for the future.
Every financial goal you set should be a SMART
goal: Specific, Measurable, Achievable, Relevant, and Time Framed.
Your
goals can be defined using these three categories:
·
Short
Term: less than one year
·
Mid-Term:
one to three years
·
Long
Term: more than five years
For example, let's say that you want to go
on a vacation to Hawaii when you graduate to celebrate your
accomplishment! Maybe you are graduating in three years. So you
have 36 months to save for your vacation. You did your research and found
that you will need to save at least $4,500 for the trip you plan to take.
So, that means you will need to set aside $125 each month until you
graduate. Guess what? You just created a SMART goal!
Your goal is:
·
Specific: You plan to go to Hawaii when you graduate to celebrate your
success
·
Measurable: You
know that you will need to save $4,500 to take your trip
·
Achievable: You will need to save $125 a month to meet your goal
·
Relevant: Your
goal is relevant to you - you plan to take a trip when you graduate as a reward
for your hard work
·
Time-Framed: You plan to reach your goal in 3 years
Now, it's your turn! Think of at
least one goal you plan to accomplish using the SMART goal steps. Use the
above thought process to lay out your goal.
Where does your money come from? List
the sources of your income (e.g., work, student loans, parents) and the amount
that comes in from each source each month. If you get one disbursement
per semester (e.g., student loans and scholarships), determine the monthly
allowance by taking the amount that's left after paying nonrecurring costs
(e.g., tuition, books, dorm room) and dividing it by the 5 months in a
semester.
Example: If you earn $400/month at work and you
have $1000 left over from student loans after paying your once-per-semester
costs, then your total monthly income is $600.
Step 3 Where is my money going?
Do you check your bank account at the end of the month or semester
and wonder where all the money went? Before you can manage your money,
you have to know how you’re spending it. Use a spreadsheet to track and
categorize your expenses for one month. Get in the habit of
recording your expenditures once a day.
It's useful to separate your expenses into three categories:
1.
Fixed Needs – Necessary expenses that stay the same
from month to month, e.g., rent, phone bill
2.
Variable Needs – Necessary expenses that may vary from
month to month, e.g., gas, food
3.
Wants – Nonessential expenses, e.g., lattes,
movies, eating out, electronics
Is this just another rote exercise in
organization and formatting? No! As you will see in Step 5, categorizing your expenses will help you balance your
budget by identifying which expenditures should be cut back on first.
If
you have a monthly savings goal (and you should!), include it as an
expense. It is much easier to save money if you've planned for it in your
budget. And it's important, too: if you run into unforeseen expenses,
you'll want to be able to pay them without going into debt. And even if
nothing goes wrong, having some savings will help you follow your dreams in the
future.
When you compare your income and expenses,
do you have a monthly surplus, or will you be needing another job and begging
your parents for help by the end of the semester?
If you already have a surplus in
your budget, congratulations! You can invest in your future.
Step 5 Make adjustments if needed.
If you're over budget, you need a strategy for controlling costs.
Balance your budget, starting with the “wants” identified in Step
3.
When you added up your monthly expenses,
did you notice any surprisingly large numbers? Did you spend $100 at
restaurants or on yet another new outfit? Did you spend more on
electronics than food?
Begin with such "wants" that you
may be overindulging in. For each type of "want," decide on
a reasonable monthly limit that will help you balance your budget.
Would it help you reach your goals if you limited yourself to spending $40 a
month at restaurants and did more shopping at the grocery store? Can you
get by without a monthly clothing or electronics expenditure, making such
purchases only after you reach savings goals? Set a cap on your
"want" expenses and see if you've balanced your budget.
If you can't trim enough from your
"wants" in order to balance
your budget, you will need to reduce your variable needs expenditures in the
short term and perhaps your fixed needs expenditures in the long term.
This may mean taking the bus instead of driving and finding less expensive
housing next year.
How do I monitor and adjust my budget?
As you've read, there are many different
options to track and monitor your budget. Don't be locked into one
choice. Perhaps you try the spreadsheet method the first month just to
get a handle on the whole "budgeting" concept. Then, try out a
website or app and keep track of your budget on your phone or laptop. It
may take you several months to decide on which method works best for you.
But, how do you adjust your budget?
Go back to Step 5 and "trim" your budget starting from the wants and
working your way up to your fixed needs. Do not completely eliminate the
"fun" out of your budget! If you don't plan for your wants, you
will be more apt to get discouraged and not stick with your budget at
all!
Remember, a budget isn’t static—it changes
as your life changes. Keep your budget in mind as you make choices and
lifestyle changes. Did you get a new job in a new location? You may need to
adjust the monthly gas expense for your car. Want to adopt a puppy? You’ll
definitely need to check your bottom line and ensure that you can afford the
upkeep. Keep a log of your expenses and don't change your spending habits
without first adjusting your budget!
It seems that the simplest of tasks for us
as individuals or families is the hardest task for a government! When was the last time that you have heard
that the government’s budget was IN BALANCE!
It has probably NOT been in your life-time. We do not have the luxury of “printing” more
money when needed or just “extending” the payment debt into a future time
period like the government, but we need to practical and work with what we
have. It will make our lives extremely
simpler! Don’t wait for the future, but
start your budget TODAY!
QUOTE TO CONSIDER
THOUGHTFUL GEM
"Why do you never have time to do your work right,
but you always have time to do it over?"
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