More on Personal Budgeting

Making a Budget

What is a Budget?

A budget is a plan you write down to decide how to spend your monthly money.

A budget helps you make sure you will have enough money every month. Without a budget, you might run out of money before your next paycheck.

A budget shows you how much money you make and how you spend your money.

Why Do You Want a Budget?

A budget helps you decide:

• what you must spend your money on
• if you can spend less money on some things and more money on other things

For example, your budget might show that you spend $100 on clothes every month. You might decide you can spend $50 on clothes. You can use the rest of the money to pay bills or to save for something else.

Why Should You Save Money?

You might need money for an emergency. You also might need to buy something more expensive, like a car. Saving money might help you buy a car, put a security deposit on an apartment, or pay for something else expensive.

What to Know

How to Start a Budget

Start a budget by gathering your bills and pay stubs. Think about how you spend money besides paying your bills. For example, do you buy a cup of coffee every day? After a month, that coffee money could add up to an expense you might write down.

When you have your bills and pay stubs:

• Write down your expenses. An expense is money you spend
• Write down how much money you make. This is called income
• Subtract your expenses from how much money you make
  

If the number is less than zero, you are spending more money than you make. Look for things in your budget you can change. Maybe something you do not need, or a way to spend less.

What if You Do Not Get Paid Every Month?

Some people do not get paid every month. If you expect things to be like they were last year, do this:

• Add all the money you earned last year
• Divide that number by 12. This is about how much money you will have for each month

For Example

Last year, my paychecks added up to $30,000.
$30,000 ÷ 12 = $2,500
I had about $2,500 each month.

How to Use Your Budget

A budget is something you use every month. A written budget will help you:

• see where you spend money
• see where you can save
• make a plan for how to spend and save your money

Your budget can help you save money for the future. You can make savings one of your expenses. You might find ways to spend less money. Then, you can put money into savings every month – maybe into a bank or credit union.

Why Should You Save Money?

It can be hard to save money, especially when expenses go up while income does not. Here are some reasons to save money even when it is not easy.

• Emergencies – Saving small amounts of money now might help you later. Everyone has expenses they do not expect.
  
  
• Expensive things – Sometimes, we have to pay for expensive things – like a car, a trip, or a security deposit on an apartment. You will have more choices if you have money to pay for those expensive things.
  
  
• Your goals – You might want to pay for college classes. Maybe you need to visit family in another country. You can plan for these goals and save money. Then you might not have to use a credit card or borrow money to pay.

How Else Can You Save Money?

You can try these ways to help save money:

• For one month, write down everything you spend. Small expenses, like a cup of coffee, can add up to a lot of money. When you know where you are spending your money, you can decide what you might not want to buy.
  
  
• Pay with your credit card only if you can pay the full amount when the bill comes. That way, you do not pay interest on what you owe.
  
  
• Pay your bills when they are due. That way, you will not owe late fees or other charges.
  
  
• Keep the money you are saving separate from the money you spend.
  
  
• Consider opening a savings account in a bank or credit union. Read more about opening a bank account.
  
  
• If you keep cash at home, keep the money you are saving separate from your spending money. Keep all your cash someplace safe.

For Example

What I did not buy this month:

Music downloads	$5.00
Shirt	$30.00
Movie ticket	$10.00
Top off the gas tank	$15.00
Cups of coffee	$12.00
What I saved this month:	$72.00

What to Do

A budget is a plan that shows you how you can spend your money every month. Making a budget can help you ensure you do not run out of money each month. A budget also will help you save money for your goals or emergencies.

How to Make a Budget

Write down your expenses. Expenses are what you spend money on. Expenses include:

Bills:

• bills that are the same each month, like rent
• bills that might change each month, like utilities
• bills you pay once or twice a year, like car insurance

Other expenses, like:

• food
• gas
• entertainment
• clothes
• school supplies
• money for family
• unplanned expenses, like car repairs or medical bills
• credit card bills

You might have bills that change every month. Look at what you paid for the same month last year. You might need $200 for your gas bill in January but $30 in July.

Write down how much money you make. This includes your paychecks and any other money you get, like child support.

Subtract your expenses from how much money you make. This number should be more than zero. If it is less than zero, you spend more money than you make. Look at your budget to see what you do not need or could spend less on.

How to Use Your Budget

You can use your budget every month:

• At the beginning of the month, plan how you will spend your money that month. Write what you think you will earn and spend.
  
  
• Write down what you spend. Try to do this every day.
  
  
• At the end of the month, see if you spent what you planned.
  
  
• Use the information to help you plan the next month's budget.

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Source: Federal Trade Commission and Federal Student Aid, https://biz.libretexts.org/Bookshelves/Finance/Personal_Finance_(Lumen)/01%3A_Personal_Budgeting
This work is in the Public Domain.

Creating Your Budget

Creating a budget may sound complicated, but all you need to do to get started is set aside some time and get organized – the benefits will make the effort worthwhile. The following steps will help you set up your budget and manage your finances by helping you track your income and expenses.

• Determine a Time Period for Your Budget
• Choose a Tool to Help You Manage Your Budget
• Review Your Monthly Income
• Identify and Categorize Your Expenses
• Save for Emergencies
• Balance Your Budget
• Maintain and Update Your Budget

Determine a Time Period for Your Budget

You can create your budget for a month, academic year, or calendar year. If you are currently attending college or career school, you may want to consider creating a monthly budget for an academic term, such as your fall semester.

Remember that your income may vary from month to month, and not all of your expenses will be the same each month. Larger expenses (such as car insurance and books) and seasonal expenses (such as a trip home during the holidays or a higher electricity bill in summer when the air conditioning is on) need to be incorporated into your budget.

Choose a Tool to Help You Manage Your Budget

To create a budget, you'll want to use a tool to track your income and expenses. You can use pen and paper, a simple automated spreadsheet, or a budgeting app. Many banks offer budgeting tools, so see what works best for you.

The Financial Awareness Counseling Tool (FACT) is a free interactive tool that can help you manage your finances. FACT covers topics ranging from managing your budget to avoiding default. Plus, you can access your loan information and receive personalized feedback to help you better understand your financial obligations.

Review Your Monthly Income

First, estimate how much money you will have coming in each month. Here are some tips for assessing your income:

• Your income may come from sources such as your pay from work, financial contributions from family members, or financial aid (scholarships, grants, work-study, and loans).
  
  
• If you work while in school, review your records to determine your take-home pay each month. If you earn most of your money over the summer, you may want to estimate your yearly income and divide it by 12.
  
  
• Include income from any financial aid credit balance refunds - money that may be left over for other expenses after your financial aid is applied toward tuition and fees.
  
  

Monthly Income Tracking Example

Income Source	Monthly Income
Income from work	$1,200
Tax refund ($360 total divided by 12)	$30
Estimated financial aid credit balance refund ($2,100 total divided by 12)*	$175
Monthly support from parents and/or family members	$250
Other income
Total Monthly Income	$1,655

*Note: If you are getting ready to attend school, you will want to estimate your federal aid credit balance by taking your estimated financial aid and subtracting your expected tuition and fees. If you have not yet received an aid offer from your school, you can use FAFSA4caster to get an early estimate of your eligibility for federal student aid.

Identify and Categorize Your Expenses

To estimate your monthly expenses, you'll want to start by recording everything you spend money on in a month. This may be a bit time-consuming, but it will be worthwhile in helping you understand where your money is going and how to better manage it. After that, gather your bank records and credit card statements showing you other expenditures that may be automatically paid.

If you are currently attending college or career school or getting ready to go, you'll also need to estimate your college costs. In addition to tuition and fees (unless covered by financial aid), you will want to include books and supplies, equipment and room materials, and travel expenses. Find details on what's included in the cost of college and tips on how to reduce college costs.

If you are still researching your school options, remember that college and career school costs can vary significantly from school to school. We have resources to help you estimate and compare school costs.

Once you have identified your expenses, you should group them into two categories – fixed expenses and variable expenses.

• Fixed expenses stay about the same each month and include items such as rent or mortgage payments, car payments, and insurance. These obligations are generally non-negotiable until you realize that you are spending too much money on rent and take steps to find a cheaper place! When creating a monthly budget, divide the amount due by the number of months the bill covers. For example, take your yearly $1,200 insurance bill that's paid in two $600 installments six months apart and divide it by 12 to know you need to set aside $100 per month.
  
  
• Variable expenses are those that are flexible or controllable and can vary from month to month. Examples of variable expenses include groceries, clothing, eating out, and entertainment. You'll want to examine these expenses to make sure they stay under control and don't bust your budget at the end of the month.

Monthly Expenses Tracking Example

Fixed Expenses	Projected Cost
Rent or dorm fee	$500
Books	$70
Electricity	$35
Gas and water	$22
Cable and Internet	$50
Car insurance ($600 divided by 12 months)	$50
Parking fee ($84 divided by 12)	$7
Car maintenance and repairs ($480 divided by 12 months)	$40
Cell phone (basic charges)	$60
Car loan payment	$125
Money set aside for savings	$50
Total Fixed Expenses	$1,009
Variable Expenses	Projected Cost
Groceries	$250
Dining out	$50
Entertainment (example: concerts)	$50
Music downloads	$20
Movies (theater and downloads)	$48
Medical (including prescriptions)	$40
Hair and nails	$40
Clothing	$50
Laundry and dry cleaning	$10
Health club	$40
Credit card monthly payment	$25
Public transportation	$25
Gas for car	$60
Total Variable Expenses	$708
Total Expenses	$1,717

Save for Emergencies

Include "Savings" as a fixed expense in your monthly budget. Pay yourself first every month! Your savings can be used as an emergency fund to help you deal with unexpected expenses. The ideal amount of an emergency fund typically covers three to six months of your expenses.

Balance Your Budget

Now that you've identified your sources of income and expenses, you'll want to compare the two to balance your budget. To do so, you simply subtract your expenses from your income.

Total Monthly Income	$1,655
Minus Total Expenses	$1,717
= + / – Difference	($62)

If you have a positive balance, then your income is greater than your expenses. In other words, you're earning more money than you're spending. If you have a positive balance, you shouldn't start looking at new ways to spend your money. Instead, focus on putting the extra money toward your savings to cover your emergency fund or to support future goals such as buying a car. Also, if you have a positive balance but you've borrowed student loan funds, pay back some of your loans and consider borrowing less in the future.

If you have a negative balance, then you are spending more money than you have. You'll want to balance your budget and make sure your expenses don't exceed your income. Balancing your budget may include monitoring your variable expenses, reducing your expenses, and/or finding ways to increase your income. Spending less can be a lot easier than earning more. Consider eating out less frequently and making your own lunch. Rent books rather than buying them, or buy books to download to your computer. Use a shopping list when grocery shopping, and buy only what you need. Ask yourself before buying anything, "Do I really need this?"

Get budgeting tips to keep in mind as you create and maintain your budget.

Maintain and Update Your Budget

Now that you have created your budget, you'll want to make sure it remains a living document and you update it over time. Here are some smart practices to keep in mind:

• Review your budget on a monthly basis. Regular review and maintenance of your budget will keep you on top of things and may help you avoid being blindsided by something unexpected.
  
  
• Forgive yourself for small spending mistakes and get back on track. Most people overspend because they buy things on impulse. The next time you're tempted to make an impulse buy, ask yourself the following questions:
  • What do I need this for?
  • Can I afford this item?
  • If I buy this item now, will I still be happy that I bought it a month from now?
  • Do I need to save this money for a financial goal?
  • Will this item go on sale? Should I wait to buy it?
  • Does it matter if I buy brand-name or can I get by with generic?

If you take a moment to think about what you're buying, you're more likely to make a choice that fits your budgeting goals.