Know Your Money – Budgeting
This is the last part of our series on preparing for life after college. Part I covered knowing your income followed by knowing your debt. We will now cover knowing your budget.
Knowing your budget begins with understanding that your income minus expenses must equal zero. This is called a zero-based budget. We highly recommend using this type of budget for three reasons. First, when income minus expense/spending equals zero it causing us to assign every dollar a job or purpose. Second, it ensures no dollar is wasted. Third, lets you see where your money is going. You can only spend what you bring in, or at least that’s what we recommend. As mentioned in Part II of our series – knowing your debt, we strongly encourage you to not spend more than you make. That is, not using credit to obtain what you need or want. Live within your means. If you want more, get more money in order to support your needs or lifestyle desires.
While the concept of a zero-based budget is simple enough, we’ve discovered that actually creating a budget is more complex. “Where do I begin?” is often what we’re asked. Well, let’s start with your income.
Income
Your income is what you make, that is, your gross income. But what really matters when you create a budget is how much you bring in, that is, your net income. An easy way to remembering the difference between gross and net is by imagining holding a net and thinking about money falling into it for you to catch. You can only catch what falls down. This is your net. You can also think about how gross it is that you don’t get to bring home what you actually earned (assuming you’ve set up state and federal tax deductions and benefits – see Part I for more details).
Expenses
Now that we know the difference between net and gross income. Let’s talk about expenses. Expenses are either variable (changing) or fixed. Further, expenses vary from person to person. What I spend my money on (e.g. candy, movies and food) may differ from your expenses. The main takeaway is that you know those expenses before the month begins and before you spend.
Where to begin?
You may ask, “How can I know my expenses before they even happen?” Well, you may know more than you think. For instance, you know the four basic necessities* (food, shelter, transportation, and clothing) will occur monthly. Anything outside of these basic necessities comes next. Examples include:
- Debt payments. Pay the minimum if that’s all you can afford. Kick out that debt fast by paying more if you can. See Part II for more details.
- Savings – work to get at least $500 in savings ($1,000 goal) for possible emergencies. Anything outside of this can be applied to your debt. If you don’t have debt, then consider saving up to 3-6 months of basic living expenses and/or investing.
- Cell phone – See our post, “Be Cool or Be Broke?” and Part II. Remember, dumb phones call and text just like smartphones. Use the internet at your local library or apartment complex if you live in one.
- Home Supplies/Toiletries
- Charity/Gifts (outside of tithing)
- Basic car maintenance (e.g. oil change and other routine maintenance)
- Grooming
- Dry Cleaning
- Spending money
- Entertainment
How should I spend?
Here are starter category percentages for the most common general spending categories. Remember that everyone’s needs and wants differ. Be flexible with yourself – as long as your income minus expenses equals zero, you are good.
*Note: The four basic necessities are just what it’s called – “basic”.
- Food doesn’t mean eating out every weekend.
- Shelter doesn’t mean the highest possible rent with high utility costs. We recommend less than 25% of your income, even less if you have certain important financial goals like getting out of debt, saving or investing.
- Transportation doesn’t mean the fanciest or most expensive car with premium gas. Get a car that will get you safely from A to B and save on the side for any possible repairs (this keeps the money in your wallet and not theirs, as in the car dealership)
- Clothing doesn’t mean the latest and greatest fashions at a premium. Get what you need to look nice and stay cool or warm. Goodwill hunting my friend, Goodwill (My wife, Tiffany, has found quality name brand and designer deals at Goodwill and consignment stores. Find a good one near you).
- If you’re a Christian, we encourage tithing 10% of your gross income first before taking care of these basic necessities. We strongly believe that if you put God first he will put you first and provide your every need (true story).
Income Minus Expenses = ZERO
This is the easy part. Simply subtract what you spend from the money you take in. If there is a deficit, it’s time to rework the budget, cut out expenses, earn more money, or a combination of these options. Remember your financial goals. It’s worth cutting out the unnecessary temporarily in order to grow financially.
We’ve found that people have preferences when it comes to budgeting tools. Some like to use pen and paper, while others may opt for a ledger, spreadsheet, or even a budget app like Every Dollar or a combination of these. Find out what works for you and use it. You may find that you switch it up from time to time. Word of caution – it takes time to nail it down. Give yourself at least three attempts at this before giving up. The key takeaway with a budget is that you write it down and stay within your means. Do not try to keep your budget in your head – you will forget.
We hope this helps set you up for life after college. We know it’s a big adjustment, but if you stay focused, determined, consistent with your budget and live within your means, we are confident that you will be financially ready for life after college.
If you would like someone to walk you through budgeting or any of the other steps such as getting rid of debt, schedule a coaching session with us by calling us or leaving a comment below.
Sincerely,
Wallet Coach