Nearly every “Budgeting Basics” blog, “cash” course, and financial professional will tell you that budgeting enables you to stay on track money-wise. But why does it matter?
Budgeting empowers you to work toward reasonable financial goals, keeping you from overspending and accruing debt. It can also facilitate access to an emergency fund, improved credit scores, and savings for long-term objectives. Ultimately, the benefits of budgeting outweigh its initial challenges, as its practical implications lead to greater financial awareness and thus to an improved sense of well-being (Gutter & Copur, 2011).
Taking the first steps toward budgeting might feel intimidating. To help, here are five budgeting steps you can implement this week to reach your financial goals.
1. Identify Sources of Income
Start by examining financial documents like pay stubs to get a basis for your monthly income. If your pay varies, review records from the past two to three months and then divide the sum of these incomes by the number of months to calculate your average monthly income. This will then help you as you build a weekly budget.
Let’s consider Jackie’s situation as an example. Jackie wants to know her average monthly income because her wages are irregular. To do this, she consults her earnings statements from the past three months, noting her net income (after taxes and other deductions are removed): $2,500, then $2,700, and finally $2,350. She adds these totals and divides by 3 to find that her average net monthly income is $2,516.67.
Next, Jackie wants to identify how much of this $2,516.67 she must put toward rent and other mandatory expenses versus how much she can spend more freely on groceries, gifts, and the like. Accordingly, Jackie notes the following monthly expenses:
- Rent = $700
- Utilities = $100
- Health insurance = $250
Adding these together, she gets a total of $1,050. This represents the base amount of money Jackie spends every month.
To get a weekly budget, Jackie subtracts this $1,050 from $2,516.67—her average monthly income—and gets $1,466.67. This represents the amount she can spend on more flexible expenses, like food or entertainment. To convert this into a weekly budget, she divides this total by 4, giving her approximately $366.67 to work with each week.
That was a lot of math! To help you keep track, here’s a quick recap on how to set a weekly budget:
- Calculate your average income from the last three months. (If your income doesn’t change from month to month, you can simply take your most recent earnings.)
- Deduct your regular monthly expenses, like rent and insurance, from this average income (average income - monthly fixed expenses = $X).
- Divide the result ($X) by 4 to determine your weekly flexible spending allowance.
2. Outline Expenses
Can you guess how much the average college student spends on food alone? The Education Data Initiative highlights that in 2021 that the average student spends $673 per month on takeout and groceries (Hanson, 2024). The same article found that students in the state of Illinois spend an average of $305 per month on groceries alone (so not including takeout).
These numbers may correspond with or differ significantly from your own food expenses depending on your precise needs and spending power, hence why it’s crucial to create a personalized spending plan that is appropriate to your situation. Begin by estimating your own expenses; make a list of the most relevant ones that come to mind.
For a quick primer on three ways to label expenses, check out our recent Budget Hacks webinar on YouTube which is embedded below. We’ve cued up to the area where we specifically discuss fixed, flexible, and occasional expenses.
To help with this, try projecting yourself into the upcoming week and envision when and where you’ll be making spending choices. For example, Jackie plans on going grocery shopping on Sunday and expects to order takeout at least once during the week. She also notes her Wednesday coffee shop visits and the rent payment due on Thursday. Since she made plans with friends to visit an apple orchard on Friday, she also includes this potential cost in her list.
3. Choose a Budget Strategy
After determining a weekly budget and noting down some possible expenses, Jackie has gained a boost of confidence. However, she’s still unsure how to distribute her funds between essential expenses like groceries and rent and seemingly less urgent ones, like contributing to emergency savings.
Fortunately, there are plenty of budgeting systems out there to help you do just this. For instance, the 50/30/20 budgeting system recommends that:
- You allocate 50% of your total after-tax income toward needs. This category would therefore include all basic expenses such as rent and utilities, car payments, student loans, insurance, and child support.
- Then, 30% should be allocated toward wants, like monthly subscriptions, shopping funds, coffees, dinners out, and hobbies—i.e., additional luxuries you can live without.
- Finally, the remaining 20% should be saved to help reach long-term financial goals, such as debt repayments or retirement.
The 50/30/20 plan is one of the most popular budgeting systems, but it is also just one of many. Even though it may be appealing to have such a go-to budgeting recipe, it doesn’t always work as well for low-income individuals, including students. Above all, your own goals, values, and needs should be the basis for your spending plan. This might mean establishing different spending ratios based on your current life stage and cost of living.
You can learn about other kinds of budgeting strategies in our Budgeting podcast episode (available on SoundCloud, YouTube Music, Apple Podcasts, and Spotify) as well as in our recent Fall 2024 Budget Hacks webinar, where we discuss strategies like the 60% Budget Solution, Pay Yourself First, and even the so-called “No Budget” Budget. Feel free to explore whichever system appeals to you.
4. Record Expenses and Income
So now you’ve found a budgeting system that works for you, or that will at least get you started. Great! Now you might consider laying out these expenses through expense-tracking and visualization tools so you can track your progress.
There are many resources to help with this, such as expense-tracking apps, which you can use to automate your budgeting. Budgeting apps often include features such as real-time updates on payday alerts, so you immediately get a notification when money is added to your account. Whichever app and features you choose, ensure it has bank-level security and keep your information up to date so your data stays safe. You can discover more about automated expense tracking through our aforementioned Fall 2024 Budget Hacks webinar recording.
When it comes to more traditional budgeting and visualization methods, a quick internet search will provide you with plenty of sample templates you can either print or save electronically.
One way to visualize data is through tables, such as the templates below. Figure 1 is for visualizing expenses, while Figure 2 focuses on income. Both were adapted from a template on Smartsheet.
If these templates feel like a good foundation, feel free to use them as a starting point by downloading the file version from Google Docs. However, there are many alternatives to visualizing spending data and identifying gaps. If you find that this method is not for you, you could try your hand at the cash-based envelope system or begin with a simple pen-and-paper method instead, as two examples.
No matter which method you choose, don’t forget to include late fees, subscriptions, quick snack trips, or a last-minute birthday gift when tracking progress—these seemingly minor expenses accumulate quickly and often fly under most people’s radar. Conversely, saving just $5 each month can add up over time, so try to leverage this trend to your financial advantage. In addition, always beware of internet scams and viruses. If you have to enter personal information details to access a template or download something from an unsafe site, this could be an indication of a scam.
5. Step Back and Reassess
The best way to keep track of your expenses is to check in on your progress. After recording or syncing up your costs for the week, consider setting aside 10-20 minutes to identify one area you are overspending on and brainstorm feasible and incremental strategies to address it.
For instance, if you find that you’ve made a habit of ordering takeout on Tuesday evenings when you could be cooking at home, you could set a calendar reminder at that time to recall your budgeting goals for the week. If you’re eating out to meet a social need, consider finding a simple dish you’d like to cook with your friends instead.
If it seems you could benefit from an extra source of income, consider a part-time job or a paid internship. In general, if your extra expenses result from a pattern of impulsive decision-making, learn how to prioritize your future self and start reframing expenses by emphasizing needs over wants.
Set Yourself Up for Success
Remember to be lenient with yourself too. Budgeting is an ongoing process. You can ease yourself into it by tracking one expense at a time or, if you’re trying to cut expenses, through step-down spending. Set aside a portion of your budget for small expenses like snack bars so you don’t feel too constricted.
Finally, reframe financial education as an investment in yourself. Keep up with future finance-related materials by subscribing to the SMMC biweekly e-newsletter, and learn more about how to manage your money effectively by watching SMMC webinar recordings such as Spooked by Spending Plans. If money-related stress feels like an impossible hurdle to overcome, consider tuning in to our Financial Security and Stress podcast episode.
After sticking to your budget and seeing how you spend your money, you’ll notice a ballooning effect on your money management skills, and you’ll be proud of the progress you made, even in the face of challenges and setbacks. And the best part of it all? Taking the first step is free!
References
Budgeting Templates. (n.d.). Canva. https://www.canva.com/templates/s/budget/
Burns, S. (2020, December 17). How To Reframe Your Money Mindset. Forbes. https://www.forbes.com/sites/stephanieburns/2020/12/17/how-to-reframe-your-money-mindset/
Gutter, M., & Copur, Z. (2011). Financial Behaviors and Financial Well-Being of College Students: Evidence from a National Survey. Journal of Family and Economic Issues, 32(4), 699–714. https://doi.org/10.1007/s10834-011-9255-2
Hanson, M. (2024, August 10). Average Cost of Food per Month for a College Student. Education Data Initiative. https://educationdata.org/average-monthly-food-spend-college-student
ILStudentMoney. (n.d.). Making Cents of Money. YouTube Music. https://music.youtube.com/playlist?list=PLRqVSDTDe6Rmowg9LRtWGO5ARQFOvS6MP
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