The fundamental principles of budgeting are important to teach your children from their earliest years. A budget may seem tricky at first, but rather than being restrictive, it actually allows you to feel more in control of your money and know where it’s going.
What are the steps to making a budget?
- Set the time frame: Will the budget be for a semester, academic year, or calendar year?
- Teach the difference between wants and needs, for example, food is a need, but a $7 premium cupcake is a want (unless its finals week, then we understand)
- Identify your student’s sources of income
- Wages from work after taxes (or “net wages”)
- Financial aid
- Gifts or other family contributions
- Withdrawals from savings
- Help set an amount for each income category
- Remember to divide one-time income across the whole time frame
- If your job only lasts for the school year, plan how to replace that income during the summer (or how to cover those months without income)
- Identify your child’s expenses by reviewing their bank account statements with them, noting recurring payments and spending for a month recording everything they spend money on, then put those expenses into three categories
- Fixed: Rent / room & board, tuition / fees, loan payments (for example, a car loan), insurance payments, gym memberships, phone (if a fixed-rate plan), etc.
- Flexible: Transportation, utilities, phone (if pay-by-usage), personal care items, clothing, groceries/snacks, entertainment, interest on credit card debt, etc.
- Discretionary: Money available after all basic living costs and savings, etc.
- Include savings too
- Always try to set aside something for unexpected expenses (a rainy day fund), just $10 per week will provide an emergency fund of more than $500 after a year (unless you’ve had an emergency)
- Start thinking about longer-term savings such as a vacation or spring break trip, future large purchases (a car or home), and retirement (just like saving for college, starting early allows time for the money to grow)
- Set an amount for each expense and savings category
- Use realistic numbers (for example, in major cities, studio apartment rents can exceed $1,000 a month — use the web to check local prices to stay on budget)
- Know the difference between a want and a need: They may need a smartphone, but not need every paid app that seems appealing
- Make sure you include a category for savings and emergencies (a rainy day fund), even if contributions start out small
- To cut expenses, you may be able to save by staying on family accounts, for example paying the cost for your parents to add a line to an existing phone plan
TIP: Total income amounts should equal the total of the amounts for your expenses plus savings (including your emergency fund).
How to encourage using the budget?
- Once a month, review actual income and expenses against what was budgeted to see how you’re doing
- If income or expenses are very different from what was planned, update the budget to reflect those changes, or change spending habits to stay on budget
- Always attempt to contribute something to an emergency fund, as little as $10 per week will add up to more than $500 at the end of a year
TIP: If you often go over budget with a debit card, visit the ATM once a week to take out cash for the whole week, then put the card away. You can’t spend money you don’t have.