Most of us enjoy dreaming about and planning for the future. Where will we live? What career will we have? Will we further our education or travel or make a great impact on the world?

One tool that helps us make decisions about the financial aspects of our future is a budget. In this article, we will explore what a budget is, what it takes to make one, what to do if it doesn’t balance, and how it helps you plan for the future.

 

What is a budget?

If I yelled, “When I say budget, you say ___?” to a crowded stand of fans, I would get a dozen different answers. Money set aside for a certain purpose. Paying the bills. My cousin’s safe word to be cheap! The term “budget” has many meanings, but as we continue throughout this article, I want to define what our definition as “a spending plan for a period of time based on your income, expenses and goals.”

Budgets, first and foremost, are spending plans for your money. Budgets help identify categories to make an estimated plan for where your money can go. Just like when pursuing your education, if you don’t have a plan for what classes you should take, you can easily get off track.

Secondly, a budget is based on a window of time. The most common timeframe for a budget is from one paycheck to the next (usually weekly, bi-weekly or bi-monthly) or for one month. You have the freedom to decide which works better for you, but remember, you should be making or updating your budget for each time period you’ve chosen.

The final component of a budget is that it is based on your income, expenses and goals. We will go more in depth on income (money coming in) and expenses (money going out), but I want to take a moment to highlight goals. How you want to use your money and the things you want to achieve with your money should impact your budget. Don’t make your budget match someone else’s budget just because. Their priorities may not align with yours and won’t take into consideration what you want for your present situation and future goals.

 

How to build your budget

So, we’ve established what a budget, is but how are we creating one? You will want to start by choosing a budgeting tool like one of the ones mentioned in last week’s article – a pencil and paper, Excel worksheet, budgeting app, or even a note on your phone will work. Using whichever tool you choose, you start by taking time to identify your income sources – these might include a paycheck, a side hustle, child support or alimony, disability benefits, or business or rental income. List all of these and add them together to get the total sum of income for this budget.

Next, identify your expenses – these might include rent or mortgage payments, utilities, food, transportation, childcare, clothing, subscriptions, phone and internet service, or debt payments. You may also want to glance at your calendar to see if you have upcoming irregular expenses, those that may not be in your budget regularly and usually occur less frequently than monthly costs, such as vehicle maintenance, insurance premiums, or textbooks or supplies for the upcoming semester.

After listing your expenses, add them together to get a total sum. Finally, you need to calculate the difference by subtracting the sum of your expenses from the sum of your income. After calculating the difference, there are a few paths to take. Don’t worry, we will address that – but for now, give yourself a pat on the back. You now have the makings of a working budget! The key to making the budget work is being consistent with reviewing and updating it, as needed, and your commitment to the plan.

Let’s pause for a moment. You might have created your budget and have a zero or negative difference between your income and expenses and you aren’t sure what to do next. The great thing is a budget helps you live, or work toward living, within your means. It is hard to look to the future if you don’t have control of your finances today, so having everything down on paper gives you a good starting point.

When I first started dabbling in budgeting in college, I had a slight negative difference and I was really worried that sticking to the plan meant I would have to say no to everything to stay or get on track, but that wasn’t the case. In reality, budgeting gave me encouragement to find creative ways to say yes and confidence when I needed to say no. For me, that looked like buying an appetizer and drinking water instead of an entree and soda sometimes at a restaurant, or not going out at all. For a classmate, it was finding a job at a movie theater because he could enjoy watching movies before or after a shift while making extra money. For you, it might look like giving up some subscriptions, starting a side hustle or moving to a less expensive apartment. The times where you give a creative yes or just say no might feel hard in the moment, but in the long run it will help you get to a place where there is margin – the amount of money left over after all obligations are met – in your budget. At times, it will feel frustrating, but the sacrifices you make today will be appreciated by future-you down the road.

 

Next steps

The plan is made – you have some margin or are working toward creating margin in your budget, and now you want to look ahead. It’s time to prioritize your goals and then put the excess from your budget toward making your future a reality. This might look like:

• Putting aside your extra $200 for the month to buy professional attire or tools for your new job
• Using $50 each paycheck to make an extra payment on your credit card
• Making a goal to save or invest $100 a month.

The world is your oyster, as they say. If you are still in the stage where you are brainstorming how or working to create some margin in your budget, I encourage you to pursue that with intensity and then move to working toward a goal when you are able. Working toward a goal will keep you motivated to stick to the plan.

Congratulations! You are off to the races (or class or work or the farmer’s market). You understand a budget is a spending plan over a period of time based on your income, expenses and goals. You did the work and listed out your income and expenses and made the commitment to continue reviewing it and staying on track with spending. Now, I implore you to keep dreaming and planning for the future, and to learn more about other financial topics that interest you. LCC has partnered with WhichWay.org to provide financial education modules that assist with budgeting, setting goals and applying for financial aid. Visit our website to learn more.

If you are wondering how paying for college can impact your budget or financial plan, join us next week for a Financial Education Month article focused on financial aid.