Last time, we introduced the concept of a budget and even provided a template for organizing your own.
However, I should say that I deceived you...in a way.
The document we made last time - dividing all money coming in and going out - was not exactly a budget. In reality, a budget is a plan of spending for the future. This old document had elements of planning in it, since it gave us an idea of how much we could spend in the next couple of weeks or so. But, here, you were budgeting indirectly, not formally.
What you made last week is actually better known as a ledger, or a recording of all transactions that an entity (in this case, you, a person; in other cases, it could be a corporation, a non-profit, a government, etc.) made in a given period of time. If this was organized further so that we could analyze the impact of each transaction on our accounts - like the checkings and savings accounts that we have with a bank - we would call it a general journal. When we’re talking about personal finance, a journal isn’t necessary for you getting to your budget. So we’ll stick with the ledger from last time.
You might be wondering how we convert a ledger, which has all of the historical transactions that we care about, into a budget, which has our plan of spending in the future? For this, we’ll have to project future income and expenses - a practice called forecasting. Forecasting is just like how one might predict a sports team’s record, or the average grade on the next midterm. We’ll use averages for an example.
So, if I spent $2,600 total on food in 2019, I would know that I spend, on average, $50 per week on food. Therefore, I can now create my budget for 2020 that shows around a $50 purchase of food per week, if I wanted to break down my budget on a per-week basis. Per-month, I would get an average of about $219 of spending on food. If you are concerned with your ability to cover all of your costs, breaking a budget down to smaller periods might be better to plan for what you need. At the same time, I might see that I made $300 a week on average through work, paid an average of $250 a week for rent, and so on. This will allow me to determine if I expect to be short any money or if I will have extra left over in any given time period.
The forecasting method should follow a general order like:
- Carry over the money you have left over from previous periods (the remaining balance in your bank accounts) or the money that you might still owe in the previous period.
- Your “projected money earned” is essentially pay for work. This is the least likely to change and least under our control, considering how hard it is, especially for college students, to change jobs, pay, or hours. Therefore, we want to project this first in order to see if anything else has to change.
- Make note of any fixed amounts that we know we will end up spending in the future. For example, if I know I want to take a spring break trip to San Francisco, I’ll take the time to ballpark how much it’ll cost me, take the upper range of that number, and plug it into my budget. For example, if I think I’ll splurge $300-$400 over my week there, I’ll make sure to put $400 in the week of spring break 2020 for my 2020 budget plan. Of course, once my trip gets cancelled because of Coronavirus, it will be heartbreaking, but then I’ll remember how fiscally responsible I am and my pain will be ever-so-slightly eased.
- Project general expenses like food and rent using the averages method, just like pay.
- See if I need to work to apply for “earned gifts” -- recall from last time that this is money that was awarded to you, but that you had to compete for -- like scholarships to cover what I can’t with my pay.
- See if I need to ask anyone to help pay for things, like family members.
Thus, our budget (actually this time) is truly complete for all of our intents and purposes, and we are one step closer to financial responsibility. Hoorah for accounting!
Now that we’ve got the less flashy personal accounting out of the way, join us next time for a look at what’s on everyone’s minds right now -- the stock market, and more specifically, investing in the long term.