When most of us think about creating a budget we never follow through because we tell ourselves, “I make some, I spend some, I even manage to save some every once in a while. I don’t need a budget to tell me that. Besides, budgets are for old people!” Unfortunately that’s the attitude a lot of college students have when it comes to managing their money, and those students go on to make serious financial mistakes later in life. Did you know it takes a financial planner an average of three to five years to erase a new client’s past financial mistakes? Think of all the time and money you could save by getting off to the right start today and not having to make up for today’s mistakes tomorrow. If you want to manage your money responsibly the first step is to create a personal budget that allows you to quickly and easily see how much you spend, how much you earn, what your profit or loss is, and how much more you need to earn to turn a loss into a profit. Creating a budget only takes a few minutes but can save you hundreds or thousands of dollars per year.
The first step to creating a personal budget is to write down your estimated income for the next year. Make sure you include all of your sources of income including your part-time job, internship, interest and dividends, gifts, money from your parents, and any other income you plan to receive. Once you’ve written down your sources of income you need to determine how much you can spend each month. To do this, simply take your total projected income and divide by 12 to find your monthly allowance. But if you have irregular income that changes monthly, or you expect to receive a large sum of money from your summer job, then you’ll need to take this into account by making certain changes to your budget. To account for irregular income, write down your expected income on a month-by-month basis on a sheet of paper or use a free online application. Be as accurate as possible with your numbers, but remember that budgeting is a continuous process which means you should get in the habit of making regular updates.
Once you’ve estimated your income and determined your monthly allowance, your next step is to allocate your allowance among your different expenses. Start with your fixed mandatory expenses first. These are the expenses that don’t change from month to month and may include your rent, car payment, utilities and other similar items. Subtract your monthly fixed expenses from your total monthly allowance and you’re left with the amount you can spend on discretionary expenses like going out with friends and traveling.
By comparing your total income to your total expenses you’ll be able to find out what your monthly profit or loss is. If your income is more than your expenses, you have a profit. Otherwise it’s a loss. It’s that simple. Once you go through this exercise for the first time you’ll see what your spending habits are and where your leakage occurs. Leakage is the few dollars, or few hundred dollars, that seems to disappear from your account at month’s end, but you’re never quite sure where it went.
Don’t be discouraged if you have a loss instead of a profit when you create your first budget. Now you’re armed with the knowledge of what you need to fix and you can easily determine how much more you need to earn or how much less you need to spend to make your budget work for you.