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With the advent of credit and debit cards, money can seem like an abstraction. Cash is no longer king, replaced by plastic. In no time at all, students may find that they’ve spent their entire month’s budget on personal expenses and unnecessary items, and then additional bills layered on top in their inboxes.
Taking control of your personal finances can seem like an arduous task, but creating and sticking to a budget can be a huge step in the right direction.
What is a Budget?
As defined by Merriam-Webster, a budget is:
1) an amount of money available for spending that is based on a plan for how it will be spent
2) a plan used to decide the amount of money that can be spent and how it will be spent
Usually, budgets are considered living documents that change as an individual’s situation changes. Personal income and debt levels change frequently. A budget should follow along these changes. However, individuals who do create a strong budget can reap great rewards. Today, only 32 percent of people have and stick to budgets. You can be in that 32 percent!
Step by Step Instructions to Create a Budget
Step One: Calculate Income
The amount of money that comes into your bank account is considered income. Student who work may consider their paychecks their income, but other sources of income may include the following:
- Student loan disbursements
- Family allowances
- Tips earned for work
- Scholarship disbursements
Every dollar that comes into your account should be included somewhere in your budget, even if that money is ear-marked for a specific expense.
Bonus Idea: “Budgeting as a student can be difficult because most students live on an irregular income. Many students work in the service or commission industry with varying hours which makes budgeting a challenge. The best way to create a budget on an irregular income is to average your income over the past three months. Add all of your income from the past three months and divide by three to give you a median income to use as a baseline“, according to personal finance blogger Ryan Luke of Arrest Your Debt.
Step Two: Calculate Expenses
Expenses are any amount of money that you are obligated to pay in a particular amount of time. Expenses vary depending on the student, the school, and the situation. However, here are a few common expenses you might see pop-up:
Every dollar that leaves your account should be included somewhere in your budget, even if it is a small amount. Every dollar counts in college, keep track of each penny!
Step Three: Calculate Debt
These days, the average student has debt in some form or another. Today, Seven in 10 seniors who graduated from public and nonprofit colleges have student loan debt, with an average of $28,400 per borrower! Moreover, 70 percent of undergraduates, and 96 percent of graduate students have credit card debt.
Credit card debt doesn’t go away and most lenders require monthly payments to stay current. Fewer than 10 percent of students with credit card debt pay their balance in full each month. Unpaid balances acrue interest over time and can drastically increase the cost of everyday purchases. Only 15 percent of students know the interest rate paid on their credit card debt!
It can take a couple hours, but students should collect all of their debt-related statements and include these numbers in their budgets. Include the amount due each month, plus any additional payments you plan to make on a recurring basis.
Step Four: Calculate Savings
Not many students consider putting money away for a rainy day, but unexpected expenses can happen, such as emergencies, car repairs, and additional course materials.
By actively putting aside extra money in savings, students can relax and ride out rainy days without leaning on credit cards. Plus, an emergency fund can really help during.. emergencies. Additionally, making a goal of saving and investing money at a young age can help prepare students for long-term savings and financial goals. Hey, people are living longer than ever these days, it is never to early to start thinking about retirement.
By getting in the habit of saving today, students can live better later on in life.
Step Five: Looking for Opportunities to Save
If you find that your monthly expenses exceed your monthly income you may need to cut back. Cutting back is hard, and it takes commitment. But, most of us don’t realize that savings opportunities exist everywhere we look.
Consider taking the bike out of the shed. Having a car can be a big expense for young adults with low income. According to our friends at College Board, cars can take up about 17 percent of the average student’s budget. Oil changes, brakes, and tires can really add up. Let’s not forget gas either!
Consider eating out just once a week, cooking at home can save students as much as 80% per month in food costs.
Word of Caution
It is hard to create a budget, and it is even harder to live within your budget. At times, you may feel like you need to take a break from pinching pennies. Unfortunately, even one month in the wrong direction can really add up for students. Federal student loan default rates remain in the double digits as students struggle to keep their head above water.
Students that don’t learn how to budget may borrow to much for school, and when they graduate they may not know how to manage their finances in order to repay student loan debt. Students who proactively shape their financial life will be off to a huge head start upon graduation.
Author: Dave Rathmanner