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How do I create a budget?

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Budgeting 101:

Step 1  Identify goals
Step 2  Where is your money going?
Step 3  Identify sources of income
Step 4  Add it all up
Step 5  Make adjustments if needed  

Step 1 Identify 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?  Budgeting involves tough choices, but having a goal will make budgeting a little less painful.

Step 2 Unravel the mystery of where all your money goes.

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. 

These links offer tools and advice for tracking your expenses and savings:

Step 3  Identify your sources of income.

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 4  Add it all up.

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.

On the other hand, if your expenses exceed your income, Step 5 will help you make some adjustments.

These links offer comprehensive budgeting tools:

  • mint.com (free; also available as an iPhone app)
  • Budget builder (free)
  • If you prefer to store your data on your home computer, try a personal finance application such as Quicken

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 2.

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.

Here are some links to pages that offer advice on saving money: