How to Create a Budget and Some Tips to Optimize It

College students are heading back to campus soon, if they haven’t already. If you or a loved one are about to embark on a year of scholastic adventures, it’s vital to have a budget in place. Budgeting is a valuable skill that will benefit you throughout life!

50-30-20 Rule

As you begin to create your monthly budget, it’s a good rule of thumb to use the “50-30-20 rule”. This rule recommends you spend 50% of your net income (after taxes and deductions) on needs, 30% on wants, and 20% on savings or additional debt payments.

Examples of Needs (50%)

  • Tuition (if paying as you go)
  • Room & board
  • Utilities
  • Food & groceries
  • Clothing (the necessities)
  • Transportation
  • Internet and phone
  • Textbooks
  • Health insurance
  • Debt (always make at least the minimum payment)

Examples of Wants (30%)

  • Dining out
  • Entertainment (movies, sporting events, concerts, etc.)
  • Music, apps
  • Clothing (trendy & fun versus needed)
  • Traveling for leisure

Examples of Savings/Additional Debt Payments (20%)

  • Rainy day fund
  • Saving for future goals (car, house, vacation)
  • Extra credit card payments
  • Extra student loan payments

Build Your Budget

After you’ve classified what is a need, want, and savings/extra debt payment, it’s time to build your budget.

Estimate Your Monthly Net Income

Whether you’re working part-time, full-time, or receive a stipend from your college (like a scholarship or grant), the first thing you need to do is calculate your monthly net income. You can do this by looking at “Net Pay” on your most recent pay stub. This is the amount of money you made after taxes and other deductions (such as insurance premiums, 401(k) contribution, etc). If your pay is consistent each paycheck (for example if you work the same number of hours every week), then take the net pay amount and multiply it accordingly to make it account for one month of work. For example, if you are paid every other week, then take your net pay amount and multiply it by two. If you’re paid weekly, multiply it by four. If your weekly hours are not consistent, then estimate your monthly net income by looking back at the last several pay stubs, take the lowest amount, and multiply it accordingly. By estimating your net income using the lowest recent pay amount, you should be estimating conservatively, which should allow for some wiggle room in your budget. If you budget too high – you may end up short when it comes time to pay your bills.

Estimate Your Monthly Expenses

After you’ve estimated your monthly net income, it’s time to write down your expenses. It’s best to list these out in a spreadsheet such as Microsoft Excel, Google Sheets, or use a budgeting app. If you’re entering these manually, go through the past few months of bank account or credit card transactions and classify each expense, then add them together. This total amount is your estimated monthly expenses. If you’re using a budgeting app, it may feature the ability to sync to your bank and pull the expenses automatically.

Financial Tips for College Students

After you’ve added your monthly net income and expenses into a spreadsheet or app, calculate how much money is left after you deduct your expenses. If there’s a deficit, then it may be time to cut back in the wants category. If there’s a surplus, see our savings tips below!

Here are some financial tips specifically for college students.

Spend Smart

This advice goes for all people in all stages of life, but college students with limited income especially need to avoid wasteful spending. Make sure you take your wants/needs list seriously and cut back on wants if you find yourself coming up short each month. And be sure to ask about student discount pricing as you make purchases. Student discounts are common at restaurants, entertainment venues, when purchasing equipment needed for school (such as computers or mobile devices), and more.

Avoid High-Interest Credit Cards or Personal Loans

Credit cards or other unsecured personal loans can be tempting to use to extend your spending power beyond your means. But beware - it’s easy to fall into the trap of taking out multiple credit cards from various retailers to finance non-essential items and end up buried under a mountain of high-interest debt that can take years to pay off.

Credit Builder Credit Card

A credit card from a reputable bank can be a good way for a college student to establish credit if used responsibly. If it’s your first credit card, the bank may set your credit limit at only a few hundred dollars. It’s recommended that you pay off the balance each month before accruing interest. This is a great way to establish and build credit, but keep in mind that as your credit account is established over time, the bank may increase your credit limit. You have to be mindful not to let your spending get out of control and make sure you can pay off the card each month.

Save, Save, Save

It’s easier said than done. But saving early and saving often will pay large dividends down the road. If you have any extra money at the end of the month, put it away and earn a return on your investment.

Savings Accounts

There are multiple types of interest-bearing savings accounts to choose from, including savings, money markets, and certificates of deposit (CDs). Be sure to put your money in a bank that is FDIC-insured, like CrossFirst Bank. We can help you determine which account makes the most sense for you and your goals.

Retirement Accounts

If you’re working (whether part-time or full-time) and your employer offers a retirement plan, opt in! It’s never too early to start saving for your retirement. Every dollar invested now has the potential to build upon itself in the future and earn you more and more over time.

Stock Market

If you’d like to explore some higher risk/higher reward investing, then you can look into the stock market. Keep in mind – investing in stocks carries the risk of losing money. We highly recommend you speak to a Certified Financial Planner before making an investment that caries risk.

Conclusion

Remember – the financial choices you make in college are just as important as the educational and social choices you make. If you create and stick to a budget now, you’re committing to sound habits that will help you avoid big headaches in the future.