Essentials of Budgeting
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Before you start a budget, it is important to understand some key budgeting concepts.
Identify what you'd like to accomplish financially and create a plan to make it happen.
We suggest setting SMART goals. SMART goals help you identify exactly what you want and how you plan to achieve it. SMART goals are Specific, Measurable, Achievable, Relevant, and Time-Based.
Specific: What do you want to accomplish?
Measurable: How will you know that you’ve achieved your goal?
Achievable: Is your goal realistic?
Relevant: Is your goal aligned with your personal identity and needs?
Time-based: By when do you hope to achieve your goal?
Keep a log of your income and expenses to get a better sense of where your money comes from, where it goes, and your patterns in handling your finances. You can do this manually (in a spreadsheet or notebook) or automatically (using a budgeting app that tracks your transactions).
Be thorough when you track. For income, list not only your earned income, but also your student account refund (if you receive one), rewards, gifts, and interest. For expenses, list not only your debit and credit card transactions, but also your usage of cash and Venmo (or similar services).
Once you’ve created your budget, track your income and expenses to ensure you’re working toward your financial goals and staying within the bounds of your budget.
In order to decide how you should spend your money, consider how your expenses fall into the following two categories: needs and wants.
Needs are items you cannot live without. These may include rent, groceries, and health insurance.
Wants are items that are not necessary but may make life more pleasant. These may include dinners out, concert tickets, and clothes.
Needs and wants are not always dichotomous. Imagine the following example: all your socks have holes in them, so you need to buy new ones. While new clothes may typically be classified as a want, this example demonstrates that clothes can be a need instead.
You get to decide which expenses are needs and which are wants based on your personal and financial priorities. After you’ve fulfilled your needs, you should feel empowered to purchase your wants based on your priorities and financial abilities. If your priorities involve seeing a new movie you’re excited about, then you should allocate money for the ticket after you’ve paid your bills (and bought your new socks).
Your expenses can be broken into two further categories: fixed and variable expenses.
Fixed expenses are expenses you incur on a regular basis and typically of a pre-determined amount. Some fixed expenses (like gas, electric, and credit card bills) may fluctuate from month to month based on your usage, but should be relatively predictable. Other fixed expenses (like rent, loan payments, and subscriptions) tend to be constant.
Variable expenses are expenses that fluctuate depending on your spending behavior. Some examples include groceries, clothing, and entertainment.
Understanding the difference between fixed and variable expenses is crucial for estimating your expenses for the month. In the case that you need to adjust your spending habits, it’s much easier to adjust variable expenses than fixed expenses.