Introduction:

What you’ll learn to do: explore strategies for budgeting and saving while in college

A budget is telling your money where to go instead of wondering where it went.

—Dave Ramsey, financial author

By the end of this section, you will be able to describe budgeting strategies and the pros and cons of budgeting. You will identify the steps necessary to create a personal budget and explore factors in financial savings for college students.

Budgeting Strategies

Budget

The term budget is unpleasant to some people because it just looks like work. But who will care more about your money than you do? We all want to know if we have enough money to pay our bills, travel, get an education, buy a car, etc. Technically, a budget is a specific financial plan for a specified time. Budgets have three elements: income, saving and investing, and expenses.

Income

Without a personal budget, most people have a hard time gauging how much money they spend and where their money goes. If you have ever gone to an ATM to withdraw money and been surprised to discover how little you had left in your account, this section is for you. It’s also for anyone who wants to learn how to manage their money better and smarter—which is an invaluable skill to have not only during the penny-pinching years of college but also later on in life.

Budgeting Strategies

Even if you’re very conscientious about paying your bills on time and generally have frugal spending habits, creating and following a budget can put you so much further ahead. In essence, a budget is a plan for how you want to spend money. It details how much money comes in each month and how much you’ve allocated for spending on each thing. The virtue of a budget is that it puts you in control of financial decisions—so you can avoid surprises at the ATM or at the end of the month. Let’s look at some strategies for creating a budget:

• Be realistic: People are often intimidated by budgets because they’re afraid the plans will be too strict or force them to cut back too much. Though a budget may reveal that you indeed spend a lot of money on clothes, that’s okay—it may just also need to show that you spend very little on restaurants and eating out to make up for it. Again, it’s about making choices and being realistic.
• Choose a timeline: Creating a budget for a fixed period of time will help you monitor whether you’re meeting your financial goals. The timeline you choose is up to you and your goals. For example, you might create a monthly budget to monitor how you spend your paycheck every month.
• Add financial padding: Even if you feel like your list of financial obligations is already long, try to set aside a certain amount each month for a rainy day fund to pay for unforeseen expenses and emergencies, like car repair, lost textbooks, etc.
• Make adjustments as needed: While sticking to your budget is important, there’s nothing wrong with revisiting and adjusting your original targets. For example, if you find that you are actually spending $50 more per month on groceries than you intended (even after shopping for sale items), you may decide to save that money elsewhere in your budget next month—on entertainment, for example.

Pros and Cons of Budgeting

While budgeting can be a useful financial tool, it may not be for everybody. Some people may feel more confident by balancing their checkbook to see how much they have at any given time. Still, many argue that budgeting helps people stay on track and avoid overspending on wants such as restaurant food, clothes, and entertainment, so they always have enough money for needs, such as rent/mortgage, utilities, and food. The following lists summarize the advantages and disadvantages of budgeting.

Budgeting Pros

• Provides a realistic view of personal finances: A personal budget provides an honest snapshot of how much money you make and how much you can spend. It can help you avoid deceptive financial thinking, such as believing that you’re flush right after pay day when you really need to save that money for an upcoming bill.
• Helps you avoid excess spending: Because a budget gives you insight into the total picture of your income and expenses, you can make realistic decisions about spending. As above, a budget can help you avoid having a faulty sense of your financial resources and remind you that even if you just got paid, most, if not all, of your check may need to go toward fixed expenses.
• Assists in goal setting: Since you get to decide how to allocate your money, a budget can help you set goals. For example, if you create a yearly budget, you could plan and account for an upcoming family trip and start saving money for it in advance without worrying about having the money at the last minute.

Budgeting Cons

• Budgets take energy: Planning a budget takes dedication. Since most students lead busy lives and are balancing different demands like work, school, and time with family and friends, it can be easy to slip up. For example, if you have a stressful week at work or school, you might overspend while going out with friends and forget how much you budgeted for leisure activities.
• Results take time: Since most budgets cover a time period of a month, year, or even longer, people may become frustrated waiting to see if their financial situation is better than it was before. Frustration can lead people to abandon their budget and go back to overspending or neglecting to save.
• Budgets may be strict: Remember that one of the important strategies for creating a successful budget is earmarking money for treats and extras such as entertainment. However, in an effort to become more financially disciplined, some people make budgets that are too restrictive and unrealistic. Severe budgets can backfire and lead to overspending in one area or abandoning the budget altogether.

Creating a Personal Budget

Even though you may be persuaded by the downsides of budgeting and think, “It’s not for me!” don’t give up until you’ve tried it. Tracking one’s income and spending is a good exercise for anyone, and if you follow the basic process below, it’s easier than you think.

• Calculate regular expenses: Using your bills, receipts, checkbook, and any other financial records you have, make a list of your regular expenses and record how much you typically pay each month or year. Since some expenses like grocery bills may vary from month to month, you’ll want to examine several months’ worth of receipts to come up with an average.
• Record your income: Identify all income sources and add up how much you receive during a given period of time. This amount should include all sources of money—from regular full- or part-time work and from intermittent sources, such as freelance jobs, babysitting, etc.
• Adjust your expense percentages, and set goals: After you outline your financial obligations and income, you can start deciding how much money you’d like to allocate for each expense. Start with fixed expenses such as rent, car payments, etc. Next, decide how much you want to devote to each of the remaining categories, such as food and entertainment. At this point you can also set specific financial goals. For example, you may decide to lower the amount you spend on clothes in order to pay off outstanding credit-card debt or save for a trip.
• Identify a method for tracking your budget: Develop a plan for monitoring your budget. You might decide to use an Excel or Google spreadsheet, a budgeting app, or a budget tracking tool provided by your bank. You can also write things down in a notebook. The method doesn’t matter, so long as it’s easy for you to access, use, and interpret.

How much money should you set aside?

The best way to figure out how much to budget for unexpected expenses is to list all the unplanned expenses you had last year, plus ones you can predict are coming soon. For example, you might predict that if you have a dog, he will have to visit the veterinarian at least twice a year for unexpected reasons. Make a list of all unexpected expenses, then estimate how much money you should have set aside for the year. Take your total and divide it by twelve and set this much aside each month. It might take you a while to get enough money set aside. Keep working on saving, and don’t give up if you don’t always meet your target each month.

The Envelope Method

Still not convinced that making and following a budget is doable? The following video describes a budgeting technique that’s very easy and straightforward to follow: the “Envelope Budget.” Simply placing cash in labeled envelopes (one for each category or purpose) each month can be a very effective means of building healthy spending habits.

Savings Strategies

Spending Hazards

Lots of students work hard and manage to cover the cost of attending college, but plenty find that they don’t have a lot left over for other important things, like housing and food. The idea of actually saving money—for things like clothes, entertainment, or other extras—may seem completely out of reach. In this section, we challenge you to take a chance and try. You may be surprised to find that you can change your spending habits, gain better control over your finances, and wind up with money in the bank. Below are some common hazards you can avoid and tips to get you started:

• New spending responsibilities: If you’re starting college right out of high school, this may be the first time you’ve had your own checking account or received regular income from a job. It may be tempting to spend what’s left over after you pay for big items like tuition and books, forgetting that you still have other expenses. Even if you don’t spend a lot of money on extras, you may not be aware of strategies for saving money, such as keeping an eye out for coupons and sales.
• Using credit cards: Young college students are often targeted by credit card companies because they have comparatively few financial responsibilities and generally have clean credit records. Owning and using a credit card can be an effective way to build a credit history and it can also be useful in an emergency, but credit cards do carry significant risk: if you don’t pay them off in full every month, they accrue interest—sometimes at a very high rate—and the total amount you owe can become an enormous financial burden.
• Neglecting to pursue scholarships: Many college students are either unaware of scholarships they qualify for or they just don’t follow through and apply. Take advantage of the financial aid office at your college. Ask questions and get help finding out what’s available to you. You may be passing up an opportunity to get money for tuition, room and board, and books.
• Recreational activities: Unlike high school students, college students don’t generally have classes all day, so they may find themselves with hours of free time. To fill that time, they may want to go to places like restaurants, movies, and shopping centers. These activities add up fast and cost more money than eating on campus with a room-and-board plan or cooking meals and socializing at home.^[2]
• Not realizing you’re paying for something: This can happen with monthly subscription to services you don’t need or use, or it can be a fee you pay to your bank to have a checking account. There are many areas where you might be paying for something when you could get a free version or cancel your digital subscriptions you’ve forgotten about.

Saving Strategies

Whether you are starting college as a single eighteen-year-old or you are older, working, and raising a family, there’s a set of basic financial strategies that can help you lower your expenses and save money while you’re in school. Analyzing your spending habits (as you just did) is the first step. Next, you can try the following:

• Create a detailed budget: Budgets will enable you to treat yourself while avoiding overspending. For example, you might allot $50 a month for going out with friends. If you’ve already spent $50, you should find alternative recreational activities for the rest of the month so you don’t have to borrow money that you set aside for other expenses.
• Cut down on meal costs: Looking for deals and using coupons at grocery stores will save more money than eating out. Students living in dorms may not have a lot of space and supplies for cooking, but they may still have room for a refrigerator and coffee maker to avoid overspending on snacks and trips to Starbuck’s. Those with adequate space should look to buy in bulk as the per unit cost is cheaper. Sam’s Club, BJ’s and Costco are prime examples of stores that give these options.
• Save on transportation: Cut down on the cost of gas (or get rid of your car altogether) by walking to class, riding a bike, or using public transportation. Check to see whether your college offers free or reduced-price student bus/train passes.
• Look for discounts and used items: As long as a textbook isn’t outdated, you can often purchase used or discounted copies online or from other students. Need to furnish a dorm room or off-campus apartment? You’ll save a lot of money by borrowing household goods from friends and family or by purchasing them from secondhand stores.
• Apply for scholarships and minimize loans: To repeat, scholarships don’t have to be repaid, and they don’t rack up interest. Do your best to apply for everything and anything that you qualify for, scholarship-wise. Winning a scholarship can have a big impact on your budget and financial health.

Remember the Big Picture

When you think about becoming more financially secure, you’re usually considering your net worth, or the total measure of your wealth. Earnings, savings, and investments build up your assets—that is, the valuable things you own. Borrowed money, or debt, increases your liabilities, or what you owe. If you subtract what you owe from what you own, the result is your net worth. Your goal is to own more than you owe.

Assets (Owned) – Liabilities (Owed) = Net Worth

When people first get out of college and have student debt, they often owe more than they own. But over time and with good financial strategies, they can reverse that situation. You can track information about your assets, liabilities, and net worth on a balance sheet or part of a personal financial statement. This information will be required to get a home loan or other types of loans. For your net worth to grow in a positive direction, you must increase your assets and decrease your liabilities over time.