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Creating a Budget

Now that you’ve thought about your financial goals, it’s time to determine how you’ll get there.  Before you can know how much you can save, you’ll need to know how much you have left over each month. Do you ever feel like you work really hard, but never have money? Or, do you wonder how your whole paycheck from two days ago is already gone? Budgeting may be the answer to these questions. For the second article in the four part series for Financial Literacy Month, we at Powercat Financial Counseling (PFC) will be educating you about the importance of budgeting and how to create a budget.

What is Budgeting?

When I think about what budgeting is I think about a famous quote by John Maxwell that says, “A budget is telling your money where to go instead of wondering where it went.”  Budgeting is tracking your cash inflows and cash outflows. It is a process in which you create a plan of how you want to spend your money. After you create this plan, it allows you to determine the amount of money you will have to accomplish goals you want to achieve. Budgeting is a simple yet complex task:  it takes work and discipline. It is a mindset and an attitude.

Why Budgeting Is Important

Now that we know what budgeting is, let’s discuss the importance of it. Budgeting is important for many reasons. One of the first reasons budgeting is important is due to the fact that it allows you to see whether you are spending more than you are making, or if you are coming out on top. We all want to come out with extra money, right? Budgeting is what helps you come out with extra money or break even at the end of every month. Creating a budget can also help relieve stress when unexpected things happen.  And finally, the budget will help you reach your short and long term goals discussed last week.

Creating a Budget:

If you have never created a budget, or even thought about a budget, don’t worry:  we are here to help. PFC offers an awesome tool called the, “Spending Plan Worksheet.” This worksheet is an excel document that allows you to create your own spending plan for each week, month, semester or year. The amount of time you set your budget for is completely up to you and what would be most beneficial for your situation. Budgeting is typically in the form of a three step process:

  1. First, you will estimate your income and expenses for a monthly period. For a lot of people, this is a major guessing game, because most people don’t know off the top of their head how much they are spending on coffee, eating out, gas, groceries and other expenses each month. After you have estimated the income and expenses, you should go through and decide whether your expenses are needs or wants.  A need can be determined based on what would have a consequence should you not pay it (i.e. rent, groceries to an extent, or tuition) whereas a want is one you can cut back in and deal without month to month (i.e. clothes, eating out, and entertainment).
  2. After your estimation is done, you will then begin the “fun” part, writing down the actual income and expenses. When recording your expenses, don’t forget to add in those “every once in a while” expenses such as getting your oil changed, getting your hair cut, and other activities. When you are calculating these expenses, take the amount you spend in a year on that activity and divide it by 12, since you are using a monthly budget. For example if you are doing oil changes, it costs you $20 every three months, which is $80 per year. Now that we have determined the annual amount, we divided it by 12, which equals $6.67 each month; this is what you should put away so that you are prepared for the expense when it occurs.  There are many ways to track your expenses for a given period (a month in this case). You can use the receipt method, which is where you keep all your receipts and record the transactions. You can also use bank statements, but bank statements don’t account for cash transactions, so you don’t want to forget to include those! You can also use the check register method, which is where you keep a running tab of your checking account. In this process, right after you spend money you write it down (in a register or excel sheet) so that you know exactly what you are spending and why.  You can also use wwwMint.com.  For more information on using Mint, check out our other article on the topic.  These are just a few ways of keeping track of what you are actually spending. Feel free to do what is the easiest and most effective for you. After you have tracked and written down your actual amounts from a month’s time, you will want to go through and prioritize your needs and wants again, to see if it has changed based on what is actually happening, not on what you thought was happening. In this step, most people are shocked because they are spending way more than they thought. For college students, we tend to spend way more eating out than we think we do, or we spend way more on coffee than we really should. The reason we estimate first, and record actuals second is so that you get a good feel for how in tune you are with your spending habits. After you become in tune, you can begin to change your spending habits to better fit your financial needs.
  3. The third step is to start determining what you want to changed, and how to attack those changes. This involves deciding if you want to be spending what you currently are or if you would like to spend more or less in each category.  If you have a deficit, it’s important to address it by increasing your income or decreasing your expenses.  If you have a surplus, you can decide where to put that extra money.  Once you determine where you want to start changing spending habits, you can start to create a spending plan/budget for next month.

Although there are only three steps listed, it is important to frequently update and monitor your budget throughout your whole life. By doing this, you are identifying where you may be wasting money, and where you can be putting that money.  This can help you put your money to better use to help you achieve your financial goals.

Be on the lookout in the next few weeks for more helpful tips about personal financial management during Financial Literacy Month.  If you have any questions about creating a budget or general financial management and would like help with any of those questions, please make an appointment and come see us at PFC.  You can make an appointment at our website: www.k-state.edu/pfc.  We provide free and confidential counseling to all K-State students.

Miranda McMahon
Peer Counselor I
Powercat Financial Counseling