Here’s a quick riddle — it is great, and yet people avoid it, helpful yet people fear it, and like all healthy things, it seems dull and uninviting. Yes, as the title says, the answer is budgeting.
The fear, the tendency to stay away, or if you tried it and did not stick with it, the unbearable aspect of budgeting stems from the common misconception that budgeting acts as a restraint. It may feel like a roadblock between your money and a well-deserved expensive dinner, or perhaps a restriction that prevents you from getting the latest game or book you have been waiting for. To begin, you must understand that budgeting is not meant to act like a chain that restrains you from spending your money and enjoying it. Rather, it is meant to give you freedom that is within your means.
Budgeting becomes a restraint when you only track how much money you have or make, set a ‘budget,’ then keep track of your spending. When that happens, the budget you make is just a limit, a set amount that you try to follow, and you most likely will find yourself thinking, “I will only spend up to this amount and save the rest of my money.” Budgeting does not work that way.
Dr. Susan Robbins, a personal finance professor at PSC, emphasizes that allocation is the most important part of budgeting. “Budgeting is not tracking where did your money go,” Dr. Robbin clarified, “It is a plan that tells your money where it is going.”
Proper budgeting is when all your money is allocated. For example, imagine you are sharing a box of pizza with friends. Not all of your friends eat the same amount. The friends who eat a lot tend to take more slices than those who eat less. Similarly, budgeting is slicing up your money and allocating those slices into different areas accordingly based on priority.
It is important that you allocate money first for important expenses like rent, debt payments, transportation, groceries, etc. Then, on savings and emergency funds. And finally, when all the critical and boring categories are accounted for, allocate money for things that you enjoy – maybe that dinner out with friends or the new game or book you have been waiting for. Dr. Robbins also advises setting aside money for a ‘miscellaneous’ fund, separate from an emergency fund, to cover unexpected purchases, like an item on sale you were not planning to buy. As for the emergency fund, Dr. Robbins recommends having a $500 emergency fund – “That amount is suitable for people starting budgeting, especially for college students, and that should cover most things that come up. And then beyond that, you could increase it depending on your stage in life and what you might need.”
An old-school method of allocating is the ‘envelope system.’ As the name suggests, this method involves allocating your money into several envelopes that are labeled based on the area where it is to be spent. “The key is to not overspend that amount you put in the envelope,” Dr. Robbins emphasizes. This means that the allocation of the money has to be well planned so the money in the envelopes is sufficient for the areas it is allocated for. It is important to note that resisting the temptation to take out some of the money in the important envelopes such as those labeled ‘Rent’ or ‘Debt Payments’ to spend on a weekend getaway is necessary. However, if you have some excess on some of the envelopes, for example if you spent less on groceries than you budgeted, it would be fine to allocate the excess for activities that you enjoy.
Modern alternatives to the envelope system are budgeting apps, which are more common today and suitable for online banking. Apps such as YNAB (an apt acronym meaning ‘You Need a Budget’) allow their users to link their bank accounts and credit cards for easy allocation and tracking. These apps are generally subscription-based, although YNAB does offer college students free use for one year. You could also create a budget plan on your own on apps like Microsoft Excel, however it is important that you are diligent in inputting and tracking your data with this method.
It is, without a doubt, challenging to begin budgeting and even more challenging to stick to. However, it is not something to avoid out of the worry of being restrained and limited, but instead a plan that helps manage your finances. And with the proper motivation and dedication, it is a tool that will help you achieve financial success.
