# Money Management

## Making a Personal Budget


### Learning Objectives

After completing this section, you should be able to:
1. Create a personal budget with the categories of expenses and income.
2. Apply general guidelines for a budget.
“That doesn’t fit in the budget.”
“We didn’t budget for that.”
“We need to figure out our budget and stick to it.”
A budget is an outline of how money and resources should be spent. Companies have them, individuals have them, your college has one. But do you have one?
Creating a realistic budget is an important step in careful stewardship of your financial health. Designing your budget will help understand the financial priorities you have, and the constraints on your life choices. You want to have enough income to pay not only for the necessities, but also for things that represent your wants, like trips or dinner out. You also may want to save money for large purchases or retirement. You do not want to just get by, and you do not want the problems associated with overdue balances, rising debt, and possibly losing something you have worked hard to obtain.
While creating a budget may seem intimidating at first, coming up with your basic budget outline is the hardest part. Over time, you will adjust not only the numbers, but the categories.

### Creating a Budget

You should view creating a budget as a financial tool that will help you achieve your long-term goals. A budget is an estimation of income and expenses over some period of time. You will be able to track your progress, which will help you to prepare for the future by making smart investment decisions.
There are several budget-creating tools available, such as the apps Good budget and Mint, and Google Sheets. Getting started, though, begins well before you find an app. The following are steps that can be used to create your monthly budget.
1. Track your income and expenses Review your income and expenses for the past 6 months to a year. This will give you an idea of your current habits.
2. Set your income baseline Determine all the sources of income you will have. This income may from paychecks, investments, or freelance work. It even includes child support and gifts. Be sure to use income after taxes. This allows you to determine your maximum expenditures per month.
1. Determine your expenses Review your bills from the past 6 months. You should include mortgage payments or rent, insurance, car payments, utilities, groceries, transportation expenses, personal care, entertainment, and savings. Using your credit card statements and bank statements will help you determine these amounts. Be aware that some of the expenses will not change over time. These are referred to as fixed expenses, like rent, car payments, insurance, internet service, and the like. Other expenses may vary widely from month to month and are appropriately called variable expenses, and include such expenses as gasoline, groceries.
1. Categorize your expenses These categories may be housing, transportation, or food, for broad categories, or may get more specific, where you categorize car payments, car insurance, and gasoline separately. The categories are your choices. Be sure to account for the cost of maintaining a vehicle or home. The more specific you are, the better you’ll understand your spending needs and habits.
2. Total your monthly income and monthly expenses and compare These values should be compared. If your expenses are higher than your income, then adjustments have to be made. Decisions of what to do with any extra income is part of the planning process also.
3. Make plans for unplanned expenses Ask anyone, an unexpected car repair can ruin a carefully crafted budget. Have a plan for how you can be ready for these random expenses. This often means creating a cushion in your budget.
4. Use your budget to make decisions and adjust for any changes Your budget is a changeable document. Add to it when you wish, refer to it when special purchases are to be made. Keeping your budget up to date helps accommodate changes in income and expenses.
In this section, we will focus on income and expenses. One of the easiest ways to manage a budget is to create a table, with one column containing income sources, another with income values, a third with expense categories, and a last containing expenses. An example is shown in .
Using the budget process, we can make decisions on adding expenses to the budget. To do so, check the cushion of the budget to see if there is room in the budget for the new expense.

### The 50-30-20 Budget Philosophy

It isn’t clear, obvious, or easy to decide how much of your income to allocate to various categories of expenses. Many people pay their bills and then consider all the leftover money to be spending money. However, when developing your own budget, you may want to follow the 50-30-20 budget philosophy, which provides a basic guideline for how your income could be allocated. Fifty percent of your budget is allotted to your needs, 30% of your budget is allotted to pay for your wants, and 20% of your budget is allotted for savings and debt service (paying off your debts).
Knowing what expenses are necessary and what expenses are wants is important, since wants and needs are often confused. The following are necessary expenses that represent basic living requirements and debt services. This list isn’t complete: mortgage/rent, utilities, car, car insurance, health care, groceries, gasoline, child care (for working parents), and minimum debt payments. The 50-30-20 budget philosophy suggests that 50%, or half, your income go to these necessities.
Wants, though, are things you could live without but still wish to have, such as Amazon Prime, restaurant dinners, coffee from Starbucks, vacation trips, and hobby costs. Even a gym membership or that new laptop are wants. Creating the room to afford these wants is important to our mental health. Not budgeting for things we want will negatively impact our quality of life.
The remaining 20% should be set aside, either in retirement funds, stocks, other investments, an emergency fund (recommendations are that an emergency fund have 3 months of income), and perhaps extra spent to pay down debt. This 20% is very useful for addressing those unexpected costs, such as repairs or replacement of items that no longer work. Without budgeting this cushion, any expense that is a surprise can cause us to miss necessary payments.
The list of necessary expenses was not complete. There are other expenses that could be included.

### Necessary Expenses and Expenses that are Wants

For some people, an expense will be necessary while the same expense for someone else will be a want. A good example of this is internet service. Many people consider internet service as a need, especially those who work from home or who are not able to leave their homes. One could also call internet service a need if they have children in school. For others, internet service is a want. If a person’s job doesn’t require them to be online, if they are not in school, if they do not have kids, then internet service can be dropped. There are public options for internet service. One could even use their phone as a hot spot.
Cars often fall into the category of need, but could also fall into the want category, depending on where and how you live. Bikes, public transportation, and walking are all options that could replace a car. This would then remove the cost of gasoline and car insurance.
Another consideration when deciding if an item on your budget is a need or a want is about your choices and priorities. A car is a need for many. But the need for a car is not the same as the need for a specific car. If you choose to buy a car with payments that exceed your budgeted amount for the car, then that car is a want. The amount you exceed the budget now belongs in the want category.
The same can be said for housing. If you want an apartment that costs $1,250 per month, but your budget only allows for an apartment that costs $900, then $350 of the rent is a want.
The point of that is to carefully consider if an expense is a need as opposed to a want.
When your expenses exceed your income, you may want to change how you budget your income to line up with these guidelines. This may mean cutting back, finding less-expensive living arrangements, finding a less-expensive (and more fuel-efficient) car, or sacrificing some specialty groceries. Using these guidelines keeps your financial life manageable.
Better still, they can guide you as you begin your life after graduation.

### Check Your Understanding


### Key Terms

1. Budget
2. Necessary expenses
3. Fixed expenses
4. Variable expenses
5. 50-30-20 budget philosophy

### Key Concepts

1. A budget is a set of guidelines for how to allocate your income.
2. Budgeting helps to plan for many of life’s expenses
3. Budgets are used to compare income to expenses. When expenses exceed income, changes have to be made.
4. Budgets can help evaluate the affordability of life changes.
5. One guideline for setting a budget is the 50-30-20 budget philosophy. The guidelines suggest that 50% of income is allocated to necessary expenses, 30% to expenses that wants, and 20% to savings and other debt reduction.

### Videos

1. Creating a Budget
2. 50-30–20 Budget Philosophy