Creating a budget: Income versus spending
Published: Tuesday, September 3, 2013
Updated: Tuesday, September 3, 2013 17:09
Creating and following a budget is one of the most basic necessities in maintaining a financially responsible lifestyle, but it can be challenging to get started. This is even more true in college, where income can be inconsistent and expenses are harder to predict. The value in eliminating or limiting these variables is tremendous.
Understanding your income is a prerequisite. This includes all sources of money, whether it is a job, FLEX points, a meal plan or even some spending money your parents may send your way. Make sure you understand the recurrence of each one and the certainty that the income in question will still exist in the foreseeable future. (Your on-campus job is closed for winter session? Take that into account.)
Likewise, create a similar understanding of your largest expenditures and figure out which ones are regularly recurring necessities (rent, car payments, other bills) and which ones are necessities, but vary from month to month (food, gas, electric bill). The first number should be fairly easy to figure out simply by adding all the bills, which should remain mostly consistent from month to month. The latter can be more of a challenge. Thankfully, modern tools make this task a lot simpler without needing to rely on traditional methods, such as counting receipts.
Online bank accounts keep track of all your transactions in real time. At any given moment, you can log into your bank account or credit card and see not only how much money you spent but where that money actually went. Vendors are clearly marked, and most online institutions are now rolling out features to “categorize” spending into broad groups, such as restaurants, grocery stores and so on.
If your bank does not provide this sorting feature or you have your spending spread throughout several banks or cards, there are plenty of tools you can use that conglomerate this information together. Currently, the most popular app for this purpose (and my personal favorite) is Mint, which allows you to easily sort all spending into custom categories. Furthermore, Mint automatically downloads spending data from your banks to constantly maintain the most up-to-date information, and can even keep track of cash spending.
To those that may be wary of storing financial information on an app, note that Mint—like most other apps in this category—can only read and sort data and cannot actually move money from one account to another. This is just one of many features that ensures your money is safe.
When your expenditures are sorted, calculate the average and maximum spending in every category. If you figure out you spent an average of $50 a month in bars during the past year, for example, but realize the maximum was $120, you have two very important pieces of information—the $50 per month average makes long-term forecasting easier, and the $120 maximum hints at a possible trend. You can use this information to plan accordingly for the same time period next year (maybe a series of birthdays). If no reason for this outlier exists, you know you simply went off-budget that month, which can be a crucial piece of information in and of itself.
Ultimately, having an understanding that “this” is my income and “those” are my expenditures is priceless. It becomes possible to note where too much money is going and make the cuts if necessary. Saving cash for a big purchase in the future is suddenly that much easier. While this advice may be rather basic, the benefits are not. Calculating your spending history and analyzing your trends is just the first step in maintaining your budget. Next week, I will continue this topic with a comprehensive overview of how to create a strict set of rules to ensure your spending falls within your plan, with a bit of savings on the side.