It was a quiet evening during the second semester of my sophomore year in college.
I sat at my desk, working furiously on my ever growing to-do list, focusing on the one thing I had been avoiding for weeks: balancing my budget.
The familiar chime of iChat buzzed as a message from my friend popped up and I clicked on it.
“Hey. How are you?” he asked.
“Doing alright. How about yourself?”
“Doing pretty well. What are you up to?”
“Balancing my budget.”
“Well, aren’t you such a responsible little college student.”
I laughed, but the comment surprised me. Didn’t he balance his budget regularly to? The answer, it turns out, was no.
A Budget…What’s That?
If you’re like most of my friends, you entered — and potentially finished college — having little to no worries about money. Your parents helped you pay for a lot of things and even if they didn’t, and the only kind of “budgeting” you did was checking your online bank account to see if there was money adequate in it before going out with your friends.
Not so the case with me. While my parents were incredibly helpful in paying for most of my college education, I knew very well what a budget was, how to set one up, and how they could work for — or against — you long before I started college.
My parents have always been very intentional about how they use money, and with the exception of the mortgage on our house, they’ve never been in debt. They’ve been financial counselors for countless individuals and couples over the years, and they made quite sure that long before myself and my siblings flew the coop, we knew what we were doing when it came to money.
I set up my first budget at the age of 12 after I acquired my first “real” babysitting job. My mom and dad took me out and got a simple envelope system that I got set up quite quickly. One envelope was for saving, one envelope was for spending, one envelope was for gifts, and one envelope was for giving. I had a set percentage that I would put into each envelope after every allowance, babysitting job or moneymaking venture and I wasn’t ever allowed to pull out of one to feed another.
When I turned 14, I set up my first checking account and over the years, the envelopes expanded to include a variety of other categories including my cat, my cell phone, car insurance, and other essentials and non-essentials.
This allowed me to stay on track with my spending all through high school and college and gave me the tremendous advantage of graduating college with absolutely no debt. I found that as long as I was keeping track of how much money I was taking in and where I was spending it, I could keep myself in check and not find myself with a $400 shopping bill at the end of one month.
This, however, wasn’t the case for most of my friends and now that they’ve graduated college, they’re not quite sure what to do. They’ve never handled their money before and they find it hard to keep themselves from overspending and as a result are racking up a lot of money in credit card debt.
As you enter into your 20s, managing your money becomes pretty important. When you’re in college and when you graduate, there typically isn’t a lot of it and you have to make it stretch much farther than it seems like it should stretch. Often you’re living paycheck to paycheck and you have no idea how you’ll ever be able to “save for retirement” like everyone encourages you to do and not starve or end up living in a cardboard box. It can be difficult sometimes, but with a little bit of planning and intentionality, you can very easily set up a budget, take control of your money, and build up those savings.
Building a Basic Budget
As I said, I’ve been budgeting my money since I started making at it at age 12, so essentially, I’ve been budgeting my money for 13 1/2 years. That’s quite a while. There have been times when I’ve done a really job with it and other times I haven’t (like that one semester I didn’t pay attention to my money at all and spent $1000 on non-essentials in 5 weeks…ouch!), but now that I’ve graduated and am a “real adult” and have to worry about things like rent, insurance, and utilities, I’ve had to be very particular about paying attention to how much money is coming in, how much money is going out, and where that outgoing money is going.
The principle of budgeting is really quite simple. According to entrepreneur and financial expert, Dave Ramsey, budgeting is controlling your money so that it doesn’t control you. Essentially, if you designate where you money is going to go before it goes there, then it will do what you want it to do.
The first thing to do when setting up a budget is to identify your essentials. Those are the things you absolutely cannot live without. Generally these include housing, food, utilities, and not much else. Depending on your work situation and transportation, gas or bus fare may fall under that “essential” category as well (because you obviously can’t work if you can’t get to work). Once you’ve defined your essentials, determine exactly how you need to spend on those each month and don’t change it. For some of those fluid essentials (like groceries and utilities), budget high. It’s better to budget too much and have money left over than to budget too little and overdraw your account. Take care of your essentials first, before anything else. And just as a clarification, “food” does not mean eating out. “Food” means the minimum amount of food you need to survive, which means groceries, because groceries are a lot cheaper than eating out.
Once you’ve got your essentials set up, you have a bit of room to play. You really can spend the rest of your money however you want. If you want to save it, then budget money into savings. If you want to spend it on clothing or travel or whatever, then budget your money for that.
Another important thing to do when setting up your initial budget is make sure it’s a zero-based budget. This means you budget all of your money before you spend it. There are some rather flexible categories like personal spending, health and beauty, and even groceries. Unlike insurance or rent, you won’t spend the exact same amount of money in these categories from month to month, but it’s important to budget your money so that all of it is designated toward a particular category before the spending begins, that way you know exactly where it’s all going and your spending doesn’t get out of hand.
Next time we’ll be talking about some more practical things to consider when building your budget and some steps to get you out of debt and saving.
Have you ever built a budget before? Or is budgeting a new concept for you? What are some things you’d like to have addressed in these posts about personal finance?