Tip 5: Create a Budget

The only way to improve your spending habits is to figure out what they are in the first place. Most people refer to this as creating a budget. “Budget” sounds so unappealing though. It reminds me of a horrible diet where all you hear about is what you can’t eat. Instead, I’m going to call it a “spending plan.” This spending plan will focus on where I want my money to go, not on where it shouldn’t go.

Creating an Effective Spending Plan
The first step of creating an effective spending plan is to figure out how much money is coming in and how much is going out.

Start by listing only those sources of income you can count on each month. Here are some common sources of income for grad students:

• Employment income (less taxes)
• Grants
• Scholarships
• Student loans
• Other income

Use this information from the past 2 or 3 months to calculate your average monthly income.

Track your monthly expenses
Next, track your monthly expenses. You can use a program like Quicken or Money or get out your checkbook register and credit card statements. I personally use Quicken. Start by tracking your core expenses:

• Tuition and fees
• Books and supplies
• Housing/Rent
• Utilities
• Phone
• Groceries/Meal Plan
• Insurance premiums
• Auto (gas, maintenance, etc.)
• Clothing
• Medical care
• Paying yourself

Some core expenses will vary widely each month, such as clothing and medical care, and others will only be due every few months, like auto insurance. Add each item up for the past 2 or 3 months and calculate its monthly average.

Discretionary expenses (a.k.a. The fun stuff)
Finally, track discretionary expenses. These are expenses that are not needed for survival, but which you still might be spending a lot of money on:

• Dining out
• Entertainment
• Travel
• Gifts
• Hobbies

Add up your monthly expenses and compare it with your total monthly income. You may find that expenses are less than your income, but somehow, you always run out of money before the end of the month without anything left over for savings. Why does this happen?

It’s probably because you haven’t been tracking something a lot of people forget about — cash. Most people spend a lot more in cash than they realize. Track your cash expenses for at least two months, and you’ll probably be surprised to find out how much goes to coffee, eating out, and vending machines.

A spending plan involves more than simply tracking expenses. You’re not writing a book about how you run short every month. The purpose of a spending plan is to direct your money before you spend it, so you don’t run out of money before the end of the month. It also gives you control over where each dollar goes.

Revisit your expenses
Reorganize your list of expenses by prioritizing them. Some items are necessities like rent and food, but others are not. Are there items you want to move higher on the list, or maybe items that aren’t as important as you thought before? As I get closer to finishing grad school, saving to pay back my student loans is more of a priority, so I will allocate more towards that.

Like most broke grad students, you probably don’t have enough income to do everything on your list. I definitely don’t. One way to get around this is to take on a second job. In a way this blog is my second job. Another option is figure out how to pay less for some of the priorities. For example, maybe you can get a better deal on car insurance. The money saved from that can go to other priorities, like saving up to pay back student loans.

Making trade-offs
By far, the hardest part of budgeting is making trade-offs. You never gain something without giving up something in return. After tracking my expenses, I noticed that I’ve been spending a lot of money on concert and movie tickets. I don’t want to completely stop going to concerts and movies, but I don’t think it would be a big deal to go less frequently. At this moment, saving up to pay back my student loans is more important. I can put the money saved from going to fewer concerts and movies toward the fund I’m building up to pay back my student loans.

A lot of people find this part of budgeting extremely difficult. They think they can save money without changing their habits. A spending plan makes these changes easier, because you’re putting your dollars where you want them to go, not where they just happen to land. Without a spending plan, you might say, “I have to cut back on eating out.” With a spending plan, you can say, “I want to pay off my debt.” The focus is on the goal, and then the action comes naturally (spend less on eating out).

If you enjoyed this post, subscribe to my RSS feed or via email for free updates.