For many students, college represents their first encounter with real world personal finance. Paying for college means students have to fund their tuition, fees, books, housing, and meals. Though some students receive financial help from their families, some are on their own, and will pay for college through scholarships, loans, or by working throughout their time in school. Either way, this is often a major challenge for students who never previously have had a budget, bills to pay, or income to manage.
The sums involved may be intimidating, but this doesn’t have to be an overwhelming experience. In fact, college is a great time for students of all ages to learn some basic personal finance habits and budgeting tricks.
Getting into the right pattern of managing and spending money in school can help set students up with greater finance practices later in life as well. That is why Maryville Online has provided this guide to budgeting basics for college students. While it focuses on college, the same principles apply to life after college.
What Is a Budget?
A budget is a financial plan used to predict and allocate money earned and spent each month. It can represent both goals, and limitations, depending on a person’s financial needs. Using a budget can help students visualize and understand exactly how much money they will have every month from all sources, as well as what expenses they need to prepare for.
While a basic budget may represent where money goes, budgeting can also help students set financial goals, or attempt to control spending, in order to make the most of financial aid, or even start paying off student loans early.
Why Is a Budget Important?
Staying on track for graduation isn’t just a matter of good grades and taking the right classes; students must be able to afford the full set of credits or classes required each semester, as well as to pay for books and other fees.For college students, whether they are earning a bachelor’s degree or returning to school for a master’s, a budget is critical to finishing school successfully.
The importance of a budget isn’t limited to academics, either. Setting up and sticking to a solid budget can mitigate the amount of debt you accrue in school, and help you make the most of your loans, scholarships, or even assistance from family. Taking on some amount of debt to attend school may be unavoidable, but your ability to spend with discipline can help seriously reduce the amount of debt you’re left with post-graduation.
Budgeting isn’t just a college skill. It’s important that every student learns budgeting strategies that help them make smart money choices in college and develop financial literacy for the rest of their lives.
Budgeting Terms To Know
In order to be capable of budgeting effectively, students should be literate in basic personal finance terms. For students who already have a foundational knowledge, brushing up on terms and learning a few new ones is practical. For students who may have opened their first bank account at the start of college, it’s essential to become familiar with these terms and build a baseline of knowledge.
Annual Fee – Some banks charge a yearly payment to have a credit card.
APR – The Annual Percentage Rate is a standard calculation used by lenders to set interest rates and fees on credit or loans.
Budget – A plan to help keep track of your earnings and expenses. A budget should account for monthly and annual expenses as well as future needs and emergency situations.
Credit Bureau – A credit bureau is a company that collects and stores information about individual’s financial behavior. Equifax and TransUnion, and Experian are some of the largest credit bureaus in the U.S.
Credit Report – A credit report is the documented collection of an individual’s financial history and standing. The information includes loans, how often payments are made, and public records. This informs lenders of the potential risk they would take for each client, and they can approve or deny credit based on a credit report.
Co-Signer – A co-signer agrees to take responsibility of a borrower’s debt in the event the borrower is unable to do so. The co-signer typically has a strong credit score in contrast to the borrower, who may have no credit history or a poor credit score.
Direct Deposit – A method of payment agreed upon by an employer and employee. Instead of using a traditional check, the funds are automatically transferred into the employee’s bank account. However, employees can choose to participate in direct deposit, or just received a physical paycheck.
Disposable Income – Disposable income is what is left of an employee’s paycheck after taxes and necessary expenses are taken out. This is the amount of money that employees have to spend on personal wants.
Emergency Fund – An emergency fund is money set aside in savings in case of an emergency, such as loss of job, an unexpected medical expense, or other unexpected financial strain. Experts typically suggest that a total of at least three month’s worth of expenses be saved up at all times.
Fixed Expenses – Fixed expenses are expenses that remain constant on a month-to-month basis. This can include student loan payments, rent, and utilities.
Impulse Spending – Impulse spending happens when an individual spends money on something they was not in their budget. This is done without considering costs and benefits before making the purchase.
Income – Income is the total amount of earnings an individual makes.
Interest – Interest is what lenders charge for borrowing money. This is calculated as a percentage and is added to monthly payments.
Long-term Goal – A long-term goal is a financial goal that will take several years to achieve. For students, this might involve paying off student loans or saving up for a house after graduation.
Needs – Needs are the basic necessities an individual needs to spend on in order to survive. They usually include food, shelter, and other bills at minimum.
Net Worth – Net worth is the monetary value of a business or individual that is calculated by subtracting liabilities, such as debt, from assets, such as debit and savings accounts.
Predatory Lending – Predatory lending are practices which are made against the borrower’s interest. They can be fraudulent and illegal or deceptive but legal, but can result in damage to the borrower.
Savings – Savings consist of money set aside for future spending. Savings can be used to collect enough money for emergency expenses,
Short-Term Goal – Financial goals to be met at or before a one-year period.
Variable Expenses – Variable expenses are expenses that change depending on the week or month they are incurred. For example, groceries are a variable expense, because it is unlikely that an individual will spend the exact amount month-over-month on groceries.
Wants – Wants are items that an individual wishes, to have but do not need to survive. This can include items like new furniture, purses, or tattoos.
How To Budget in College
Budgeting may not be the most exhilarating activity, but it may be critical to academic success in college. Lose track of your spending, and you may find yourself applying for additional student loans, or unable to enroll in your planned courses for a semester, delaying graduation.
Fortunately, it doesn’t have to be complex: all you are really doing is adding up expenses and sources of income, to set priorities and deadlines to pay for everything you need.
List and Categorize Your Expenses
The first step to budgeting is for a student to make a budgeting worksheet listing all expenses and categorizing them by needs or by wants. As defined in the glossary above, a need is a basic necessity required for survival. A want is something a student wishes they had, but does not need to survive.
Before they even begin the first day of school, all students should have an idea of some major expenses — tuition and academic fees, especially.
To count up additional expenses, students can go through their last month’s bank statements and compare how much they spent on needs and how much they spent on wants. These can be organized on a scale of 1-3 to prioritize their importance:
- 1 = must have
- 2 = really want
- 3 = would be nice
This categorization would label some needs as 2’s, such as saving up money for a house. It can also help students quickly identify any unnecessary spending, and take out any level 3 wants from their budget as needed.
Calculate Your Total Income and Resources
Students can begin to calculate their fixed income by listing out their earnings. This would include scholarship money, student loans, money they receive from family, and any income earned through employment.
This is where the real substance of the budget begins. Students can start by subtracting their level 1 needs that they need to survive. Once those are subtracted, they can see how much money is left over, and start to add in level 2 needs or wants. If they still have money to spend after that, they can consider adding in some level 3 wants. The goal should be to cover as much spending as possible, without completely exhausting all sources of monthly income.
While it is technically ok if a student’s expenses are equal to their sources of income, ideally, spending would be slightly less, enabling some money to be saved each month. This is particularly important if a student is using debt (student loans or other borrowing) to pay for school. If they have money left over from a student loan after spending on their needs, the rest should be given back, or saved to pay off loans in the future.
Budgeting Tips To Stay on Track
Though making a budget is an essential first step, it can be difficult to stick to it all the time. After making a budget, students should develop healthy spending habits and use smart tips to stick their plan. The Department of Education offers valuable resources and tips to help students, including:
- Overestimate Expenses: Students can round up all their bills and recurring expenses to a slightly higher total than they will actually owe, so that they’re more likely to underspend instead of overspend.
- Underestimate Income: Similar to the above tactic, students can round down monthly sources of revenue to increase the chances of having extra money at the end of the month rather than not enough.
- Ask for Help: Talking to family about the budget and knowing how much, if any, they will contribute.
- Save: Putting money aside for an emergency fund can be invaluable for students. It is tempting to put spare cash toward rewards and wants every month, but unexpected expenses and spending on non-recurring needs can suddenly wreck even the best budget if there isn’t some saving built-in.
Additionally, students can take advantage of other resources, such as phone apps, that let them keep track of their spendings:
- Mint: Created by Intuit, Mint lets users track and manage their money, and has features particularly useful in budgeting.
- PocketGuard: This app helps users stick to their budget, which is useful for students who tend to overspend.
- Wally: Wally is an app designed for budgeting that supports many types of foreign currencies, making it a good choice for international students to use.
- Prism: With Prism, students can pay the bills using the app, making it easy to track payments.
- Albert: This app creates a budget for the user, making it simple to use for beginners.
Tips To Save Money in College
Even with a plan and resources to help students stay on budget, it can be difficult to avoid spending on wants. With a few extra money-saving tips, students can optimize their money and avoid making financial decisions they may regret later.
Research Before Spending
The first tip is to research and comparison shop. Before deciding to buy shoes, clothes, or other items, students can compare prices from different stores, look at various brands, and search for coupons to use that can help save some money.
Once students find the smartest option, they can save the rest of the money they would have spent into their savings account.
Save Pocket Change
Another way to collect some funds that can go into savings is for students to keep any and all change they get. It may not seem like much, but everything from pennies to quarters can slowly add up to pad a savings account.
Attend University Events
Students should also take advantage of events offered by the university. Oftentimes, these events are usually free, they may provide free food, and they can be entertaining. Students can go to these events instead of going out to eat or spending money on entertainment. This way, students can have fun with their friends, and meet new people, without spending a penny.
Start Paying Off Your Student Loan Interest Early
Most student loans begin acquiring interest when students sign up for them, which is important to understand. This means that if they are able to, paying a little bit each month can help them keep their loans from acquiring even more interest.
Common Student Budget Mistakes and How To Avoid Them
Even with the help of tips, tools, and resources, students may make plenty of money mistakes. Savvy students will need to practice saying “no” when it comes to spending money they need to save.
Too Much Social Spending
One of the challenges students may face while trying to stay on budget is spending too much money on social activities. However, students will have to learn how to say no sometimes when going out means bending their budget. Though it may not seem that splurging once in a while is harmful, it quickly adds up, and can ultimately undo a budget.
Instead, students can suggest alternative activities. For example, instead of going out for dinner with friends, they can all make a meal together. Instead of going out to a movie, they can have a movie night at home.
Paying Too Much for Textbooks
Students may also be paying too much money for textbooks. While some classes do require students pay full price for a new textbook, students can usually buy used or rent textbooks to keep costs down.
Additionally, students should try to resell their textbooks at the end of each semester to get some of their money back. In addition to the university bookstore, sites like Textbooks.com and Chegg buy used textbooks from students, revenues from which can be used to help pay for the following semester’s books.
Racking Up Credit Card Debt
While credit cards can be useful and practical for students, they can also be dangerous. Students who can confidently pay off their credit card debt can help students build credit, but if they miss payments or overspend, it can have the opposite effect.
Students who are prone to abusing a credit card should not get one, and if they do, they should use it only for emergencies.
Misusing Their Student Loans
Sometimes, students have leftover student loan funds after their tuition, textbooks, and other fees are paid. A common mistake for students in this situation is to keep the money and spend it on nonessentials, but this only increases the amount students have to pay back plus the interest.
Instead, students should use the money to make some payments, or save it in their account to make their first few payments when it’s time to pay back the loans.
Not Applying for Scholarships
Students can miss out on a lot of financial opportunities by not applying for scholarships. Even smaller scholarships can make a huge difference, so making time to apply for is well worth it.
College Budgeting Myths
Just as there are many tips to help students budget in college, there are also many myths about college students and money. These myths can misinform and mislead students into making poor money decisions. That’s why it is important for students to be aware of these myths and why they’re not true.
Myth 1: Students don’t need to save money during college. This myth perpetuates the idea that putting money away for savings can wait until after graduation, but having a savings account is important for students. It can provide assistance in an emergency situation, or help to begin paying off their loans when they graduate.
Myth 2: Students should have and use a credit card. While credit cards can be useful, if a student is unable to make their payments on time, or if they spend too much money with it, it’s better not to get one. Doing either of these things can be hard to come back from, and can damage a student’s credit.
Myth 3: Spending money on going out is a social obligation. As stated above, there are many ways for students to have fun, either by saving money, or without having to spend any money. University events and resources, student discounts, and more can be just as fun and good for a student’s wallet.