Is Budgeting Really That Hard?
Published Fri, May 1 2020 at 10:22 PM PT
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By Obioha Okereke
So you’ve run out of money again? Don’t worry, it happens to all of us.
Saving money is one of the greatest challenges for college students (and adults as well). Arguably, the biggest challenge is making money to save in the first place. Budgeting is not just a challenge for college students, but a challenge for the average person.
A majority of Americans are living paycheck to paycheck and it has become common for college students to joke about being broke. You might be thinking that the only people struggling are those with low paying jobs. Wrong. Even higher-wage earners are running out of money. All pointing to a common problem - a lack of financial literacy.
But do I really need a budget?
Well, creating a budget not only helps you understand your current financial situation, but also helps you prepare for the future. It works to help you decrease your risk of overspending and encourages you to live by your means. A large percentage of Americans don’t have enough savings to survive a financial emergency and this is a major problem.
Why do so many budgets fail?
Quite simply, humans struggle with delaying gratification and also get sidetracked with sudden expenses and emergencies. Before we get too far, check out this video from our mini-course “An Introduction to Budgeting and Saving”
Understanding Budgeting
The first step to any budget is understanding your income and your spending. Your gross income is how much money you make every month before taxes and deductions. This is slightly different from your net income, which is the amount you’ll see at the bottom of your paycheck. Your “net income” amount is your gross income minus taxes and deductions. Knowing these amounts is helpful because it helps you keep track of how much money you’re making!
Your net income can otherwise by known as your disposable income, which is the money you have left after taxes to spend, invest, or save. Once you’ve paid for all necessities like rent, insurance, and food, you’re left with your discretionary income. This amount is key because it is the true amount you’re able to invest, save, or spend on wants and hobbies.
The next step is to track your expenses.
When it comes to expenses, here are some terms you need to know:
Fixed expenses
Variable expenses
Flexible expenses
Unexpected expenses
Fixed expenses are items like rent that are fixed and paid regularly on a schedule. Fixed expenses are easy to budget for because they don’t change often and are paid once a month, or every other week (rent, car payments, etc.).
Variable expenses fluctuate depending on usage. A great example is gas for your car - the more you drive, the more you spend on gas. Other variable expenses are food, electricity, water, and phone bills. Unlike fixed expenses, these costs can change significantly from month to month. Cutting variable expenses can be difficult but there are some simple solutions.
If possible, taking the bus can help you reduce expenses related to gas and vehicle maintenance. Prioritizing what foods you need and allocating a smaller budget to foods that you don’t, can also be a good starting point. Stick with what you need and don’t get caught up making impulsive purchases (buying things you don’t need just because they’re “on sale”). Using coupons can help as well.
Flexible expenses are items that can be easily reduced, or eliminated. A great example of this is your morning cup of coffee, clothing, and entertainment. Netflix? Yes, that is a flexible expense as well. Despite it being regular and fixed, you can eliminate this cost by just watching regular TV.
Categorizing your expenses is a great way to start out, and makes it easier for you to understand what expenses you can start cutting. More importantly, once you create a budget, you need to STICK TO IT. In the event of life, or career changes, it may be necessary to modify your budget based on changes to your income/expenses but otherwise, you will want to remain consistent.
Commonly, people create budgets and forget about them, or, they overspend and decide to throw the budget away because they don’t believe they can follow it. Do not fall into this trap. There are so many do’s and don’t’s when it comes to budgeting, but the key is to figure out a way that works for you, and stick to it.
Want to learn more about budgeting? Email learn@collegemoneyhabits.com or check out some of our related posts below.
