“I’m a college student, why do I need a budget?” “I’m living off of Ramen noodles, why do I need a budget?” “My parents control all of my finances, why do I need a budget?”
As a former founder and director of the Center for Financial Independence at Northeastern University, I was asked these questions very frequently. Many students and families wondered why budgeting is so important, and why so many “financial gurus” focus on this particular aspect of personal finance. The reason is quite simple. Budgeting is the cornerstone of financial education. Knowing, understanding, and being able to follow your budget is the first step that will eventually get you to financial success by helping you achieve your goals. Just picture this: budgeting is the foundation of the house. The foundation determines the location, width, height, and the general structure of the said house. If there is damage or a crack in the foundation, the whole building may eventually collapse. This is why it is very important to have a solid foundation and do regular check-ups.
As a college student, knowing that your “foundation” (or your budget) is safe and secure will give you a great peace of mind. This is very important, especially during the time in your life when so many other things could be “up in the air”. And don’t forget, having a budget is also closely tied to your goals (financial and otherwise), so if you want to progress while getting your education, you better get going on creating and understanding your budget.
If you’re thinking to yourself, “I don’t have any financial goals yet; I’m too young for major purchases.” That’s fine, but what about other goals, such as study abroad, attending a concert of your dreams, spring break, or that new camera that you’ve been eyeing? These are not “major purchases”, but they can certainly fall on your list of wants/needs/goals. You will need money to accomplish those objectives, so saving and maintaining a budget will be instrumental in achieving those seemingly “non-financial” goals.
Now that we are on the same page regarding the importance of budgeting, let’s discuss what creating a budget actually means. Let’s do this simply. Take out a piece of paper and on the top of the page write “income”. Then write down any source of income that is applicable to you. This can be regular income, such as your paycheck from a part-time job or work-study, or a regular allowance from parents. You should also include irregular income, such as gifts, savings withdrawals, contests, raffles...etc. Once you have all of your income listed out for the month, let’s move to spending and savings.
There are two categories when it comes to spending: fixed expenses and variable expenses. Your fixed expenses will include costs that are unarguably always going to be there, not changing, every month. This includes things like rent, food, utilities...etc. Go ahead and write down all of your fixed expenses on the piece of paper that you have in front of you. If you’re struggling with this section, check out this helpful tool from Edmit to come up with the necessary line-items for your new budget.
Before we move onto variable expense category, which is also sometimes called “discretionary spending”, let’s discuss savings and goals. Unfortunately, I have seen many students do this: they start their budgets by listing out all their income; they allocate enough money for their bills and fixed expenses, and then allocate the rest to variable expenses. After that, if they have anything remaining, they may put it towards savings. This approach to budgeting is problematic because most people tend to spend what they have. For example, if you THINK you have 100 dollars to spend, you will spend it, even if it means purchasing something unnecessary. That way very little (if anything) gets put away towards goals.
A better approach to savings would be to figure out how much you want to save each month and then allocate those funds BEFORE you move onto discretionary spending. For example, if you know that you want to go on a trip in 5 months that will cost you a $500, you should allocate $100 each month towards that trip (this is your goal). When the time comes to travel, your money will be readily available to you and you won’t have to scramble, borrow, or put the whole cost on a credit card.
Once you figure out your goals (you should have 1-3 reasonable goals to work towards each month), move to your variable expenses. These expenses could include things like clothes, going out to dinner, or entertainment.
To give you a better idea of what your budget could look like as a college student, with categories pre-filled for you by Edmit’s research team, check out this tool: GET EDMIT'S STUDENT BUDGET TEMPLATE
Overall, my answer to the budgeting questions is… yes, you absolutely need a budget as a college student. The first thing you need to do is to get started. Don’t be afraid to make mistakes and to update your budget frequently because it’s a living document, and it shouldn’t be static. Visualize your goals, work towards them, and then reward yourself after achieving them. Set spending limits for yourself and try not to go over them. If you absolutely must spend more than you intended, have an “emergency fund” to draw from. Use whatever method of budgeting that works best for you - pen and paper, an Excel spreadsheet, or Edmit's template, Mint, or YNAB.
At the end of the day, budgeting can actually be fun! You’ll see where your money is going, where to “trim the fat”, and where you can splurge. Having that knowledge and the flexibility when it comes to your spending and goals will soon put you on a great path towards financial success.
Anya Ilkys is a founder and former director of the Center for Financial Independence at Northeastern University. The Center's mission is to provide students with the knowledge and skills needed to make informed decisions, both short-term and long-term, in all aspects of personal finance such as: budgeting, investing, debt management, saving, credit cards, student loans, home/car purchases, retirement and more.
Founded by recognized university leaders, Edmit provides personalized insights and advice to help families find colleges that meet their academic goals and are within their financial means. Families that use Edmit make smarter college choices leading to less debt and better earnings outcomes, saving thousands of dollars.