Recent surveys and studies suggest that many young adults lack basic money management skills. Too often, students enter college at a loss for managing their personal finances. College may be the first opportunity you have to experience some independence, and may be the first time you are faced with budgeting and making financial decisions on your own.
One of the simplest, yet most important steps to controlling your finances is budgeting. To start the process, determine your take home income and total expenses. Then break it down to a simple formula:
Income – Expenses = Positive or Negative Outcome
As you can probably guess, you want to end up with a positive outcome. To accomplish this, you need to spend less than you earn. It may sound easy, but it can be difficult. In order to calculate this number, you’ll want to sit down with a list of your monthly expenses.
Here are some steps to get you on track to creating a budget and taking control of your financial future.
Know your income sources.
This is usually pretty straight forward. It’s typically money you earn from a job, but if you’re a student it can also be money you’re receiving from financial aid sources (grants, scholarships, or loans), money from your parents or other family members. To ensure your funds last the entire semester, you may need to average out your financial aid to a monthly amount.
Identify your expenses by using a daily spending diary.
Fixed monthly expenses like rent, car payments, insurance, and any other expenses you pay every month are easy to identify. The daily spending diary can help you track your variable expenses like food, entertainment, and clothing. After tracking of all of your expenses for a month, you may be surprised at where your money is going.
Figure out needs vs. wants.
When looking at your expenses or potential purchases, it’s important to make a distinction between “needs” and “wants.” There are some things you absolutely need – like housing and food. However, some things may fall into the “wants” category, like frequently eating out.
Find room for improvement.
After you’ve identified all of your expenses, find areas that can be reduced or even eliminated. Remember, you want to spend less than you earn. That goes for credit cards, too. It’s easy to spend what feels like “free money” but that debt can catch up with you quickly with interest.
Stick to it.
The last step, and possibly the most difficult, is to stick to your budget and resist the temptation of unnecessary spending.
After you’ve crafted your budget, stick to it each month, then evaluate how you’re doing. Are you staying within your budget? Are there problem areas you need to address with some of your expenses?
After you’ve created your budget, you’ll start to experience the benefits.
- Ensure you don’t spend money you don’t have
- Far too many of us spend money we don’t have using credit cards or student loans. A good tip is to only use credit cards when you can pay the balance each month and only use student loans for what you need (not want).
- Shed light on bad spending habits
- Building a budget forces you to look at your spending habits. You may find areas where you are spending money on things you don’t really need.
- Leads to a brighter future
- Budgeting allows you to position yourself for a more successful future. It’s far easier to “live like a student” when you’re actually a college student as opposed to trying to climb out from under a mountain of debt later.
Budgeting doesn’t mean spending as little money as possible or feeling guilty about every purchase. It’s about knowing your limits and making sure you have control of your finances.