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Financial Literacy for Students: Budgeting

Various Budgeting Methods

There are many budgeting methods, a few of which are explained here. There are also apps and software that you can use to help you with budgeting.

Choose whatever method works best for you. 

You can also keep a written log, spreadsheet, or whatever other method works for you.

The important part is to KNOW what you have coming in (income) and going out (expenses) and to aim to have less going out that coming in each month. 

Zero-Based Budgeting

In Zero-Based Budgeting, your income minus your expenses should equal zero (balance out). Savings goals, fun, and debt payments are included in your expenses in this method.

The goal with this method is to give every penny you earn a purpose.

How to use this method:

  • Know your total income - Find out how much money you have to work with
  • Track your expenses for a few months to learn what you tend to spend on, and how much - This creates a framework you can use going forward. You'll be able to visually spot areas where cutbacks can be made and where you would like to allocate more funds
  • Then categorize these expenses - Identify all of your priorities, including needs and wants, savings goals, and debt repayment

Pros and Cons:

  • Pro - This budget help you stay aware of how much money is coming in and going out, which can help keep you from spending what you don't have
  • Con - You have to stay consistent and keep a close eye on your expenses
  • Con - If you don't account for variable expenses you may not leave yourself with enough funds to cover them
    • An example of a variable expense is car registration, which you only pay once every two years

50/20/30 Method

The 50/30/20 Budgeting Method breaks down how much of your net pay (take home) you should put toward three separate categories:

  • 50% - Needs - Required expenses
    • Housing, Food, Transportation, Utilities, Insurance, Child Care, Minimum loan payments, etc.
  • 30% - Wants - Extras that aren't essential
    • Subscriptions, Travel, Entertainment, Shopping, Dining Out
  • 20% - Savings - Money for paying down debt and building savings
    • Starting and growing an emergency fund, saving for retirement, paying off debt

You can try an online calculator, like this one from Nerd Wallet, to see how this may work for you

Pay Yourself First

Pay Yourself First budgeting can also be called "reverse budgeting" because you prioritize your savings over your expenses.

The most common way to do this is to allocate a portion (amount or percentage) of each paycheck to go directly into your savings. Having direct deposit set up is the easiest way to do this, as it will go directly into your savings each payday without you having to do anything at all. Review your finances first to determine an amount (or percentage) you are comfortable setting aside with this method.

Pros and Cons:

  • Pro - Out of sight out of mind, the savings builds with no effort from you, so you may be less tempted to touch the funds
  • Pro - The amount you save is determined by you. You can change it at any time based on your needs
  • Cons - Prioritizing savings over paying off debt may not be in your best financial interest

Contact

James A. Cannavino Library

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