How do I create a budget?


Budgeting 101:

Step 1  What are my goals?
Step 2  Where is my money coming from?
Step 3  Where is my money going?
Step 4  Add it all up
Step 5  Make adjustments if needed  

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.  Download this form to plan out your SMART goals:


Step 2 Where is my money coming from?

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.   Download this form to create your budget:


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 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:

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.

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