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Creating a Student Budget

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Creating a Student Budget

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Chances are, college is the first time you're out on your own. While it might not be your first experience with paying bills or working a professional job, it may be the first time you have to consider your personal budget.

Why does a budget even matter? Well, following a budget can help students build great financial habits for life after graduation and beyond. Education is a major expense and concern for many students and families across the country. The planning and strategy around educational expenses and/or student loans-depending on your situation-is extremely important. In 2017-18, the average bachelor's degree recipient owed $29,000 in student loans, according to CollegeBoard.1 Whether you're helping cover your student loans or putting yourself through college, budgeting is a valuable way to prioritize your needs and expenses, efficiently manage your debt, and still be able to enjoy your college experience!

Barry Garapedian, financial advisor and managing director of The Oaks Group at Morgan, shared a little budgeting wisdom.2

Understanding Your Expenses

Understanding your ongoing expenses is key in creating and following a budget. Students face a few unique expenses which are important to consider.

Ask yourself the following questions:

●      How is my college tuition being paid for?

○      Student paying tuition, family paying or helping pay portion of tuition

○      Out-of-pocket, financial aid, or a combination of the two

●      What additional expenses come with college?

○      Textbooks, food, rent, the cost of living on campus, transportation fees, etc.

●      Do I have a checking and savings account?

●      Do I have any credit cards? What am I spending each month?

Once you have an understanding of how much you'll be responsible for financially, you can start creating your personal budget.

How to Start Making a Budget

When you're looking to create a budget for the first time, it is important to understand that there is not one formula that works for everyone, budgeting is not a "one size fits all model." We each have a unique life situation and individual goals for ourselves. With that in mind, create a realist budget that fits you. Start with a basic framework or technique that you can adjust and make your own depending on where you are in life.

"One technique that I discuss with young adults and students is the 60/40 strategy," Garapedian said. "Each person's budget and strategy will be different. Your budget should be customized to you, your current lifestyle, needs and expenses, as well as your future goals. The macro idea is to encourage students to reduce expenses, where they can, and efficiently implement a savings and debt reduction strategy."

The 60/40 strategy advocates that about 60% of your income goes towards essential expenses and needs such as rent, food, groceries, tuition, and insurance, as well as a portion towards discretionary expenses like a gym membership, weekend vacation, or new clothing. About 40% of your income is designed for the savings strategy and debt reduction.

Savings can be broken down further into three different categories: Retirement Savings (401k or IRA), Long Term Savings and Goals (purchasing a home or car, family vacation, real estate investment, etc.), and Short Term Savings (reserve or emergency account for unforeseen needs or costs). The remaining 10% of your income is allocated towards debt reduction and minimizing liabilities over time.

For example, let's say a hypothetical student is making monthly income of $2,500. In the 60/40 strategy, they would put $1,500 toward essential and discretionary expenses every month, $750 into their savings (distributed between retirement savings, long term savings and goals, and short term savings), and $250 towards debt and student loans.

Once again, you can adjust the framework to fit your specific needs and time horizon. Perhaps you have little or no liabilities at this time, in which case you may consider increasing your savings. Or maybe you have a large amount of debt that needs to be paid off over the next couple of years. In this case, you can allocate additional income toward paying off your debt each month. In the meantime, you can cut down on your long term or retirement savings, or even expenses.

How to Keep Track of your Budget

There are numerous ways to hold yourself accountable and keep track of your personal budget and strategy. You can research various budgeting apps online, or you can create a personal spreadsheet on your computer. Do what works best for you and your everyday lifestyle.

Start by creating a budget that includes each month of the fall semester, from August to December. Then breakdown each month's total expenses and income.

Each semester you may encounter fluctuating costs and a potential increase in your fixed expenses. This month-to-month breakdown allows students to budget appropriately for months with greater expenses, such as school supplies and textbooks.

Tracking your Income

In the budgeting software or spreadsheet, make a column for income. Include everything from salary to commissions or tips, and any other additional income you may receive.

Tracking your Expenses

A good way to start is by dividing your expenses into two separate categories: essential expenses (needs) and discretionary expenses (wants). Remember to prioritize your needs, but also don't forget to have fun, it's important to have a small portion set aside for discretionary expenses as well!

First make a list of all your Essential Expenses. For example:

●      Tuition

●      Student loan payments

●      Rent

●      Insurance

●      Car payments

●      Credit card payments

●      Essential utility payments (gas, electricity, water, etc.)

●      Food/groceries

Next, make a list of all your Discretionary Expenses. Items such as:

●      Textbooks

●      School supplies

●      Gym membership

●      Internet plan

●      Phone plan

●      Restaurants/takeout food

●      Fun activities/special events

●      Travel

●      Clothing

●      Miscellaneous

Once everything is listed, total the expenses in both columns, and then add them together for your total monthly spend.

Now compare your total monthly expenses and savings/debt reduction to your total monthly income. How much are you spending relative to your income?

If there is a surplus of income each month after all expenses are paid, you may want to consider implementing a savings and debt reduction strategy that's customized to your unique situation and goals. If there is a deficit and the total spend exceeds the total income, then you need to look over your expenses and think about ways to efficiently cut costs where you can.

If you do see a surplus of income, create additional columns in your spreadsheet to track your savings and/or debt reduction strategy.

"Set goals for yourself, monitor your progress and adjust if necessary," Garapedian said.

How to Cut Expenses

Cutting down on your monthly spend is easier than you may think, especially when you have your budget as the guide.

Spend Less on Textbooks

Buying textbooks from the university bookstore can be costly. You can save money by renting textbooks online, purchasing them from third-party websites, or downloading them onto your phone or Kindle.

If you have old textbooks, consider selling them online, to a bookstore, or even donating them to a younger student in need.

Compare Housing Rates

Where you live can make or break your budget. A 2015 study by Trulia found that it was cheaper to live off campus in 15-out-of-20 colleges. The cost of rent versus the cost of a dorm will depend heavily on your location - big cities like New York or L.A. are going to be significantly more expensive to rent in than to live on-campus, while smaller cities will likely have more affordable living options off campus.3

Don't forget about roommates! Having a roommate can also help save you money on rent, utilities, groceries, and more.

Cut Down Utility Plans

Do you really need cable TV in 2020? Or a 150 download speed for your internet? What about your phone - is the newest iPhone a necessity? Chances are, you don't need the best and the flashiest plans technology has to offer, so cut back on your internet, on your phone, and consider cutting out cable entirely. There are far more reasonable streaming services you can use, like Netflix or Hulu, or other more affordable alternatives.

Cook Your Own Meals

Dining out at a nice restaurant in town or even ordering through a delivery service can be expensive. From a burger at a restaurant, to adding in delivery fees and driver tips from delivery apps, it adds up fast. You can spend half of what you would in a restaurant at a grocery store and make a meal that can feed about 3-4 people, or provide you with leftovers for the next couple of days.

Stick to Your Strategy and Goals

The final tip Garapedian offered was to follow your strategy as closely as possible.

"It may take some time to adjust to your new spending plan and integrate these practices into your life. Challenge yourself to stay on track with your strategy as much as possible, this is key to achieving your short and long term goals and ultimately, building a successful financial and personal life," Garapedian said.

"Remember, your personal budget is a living and breathing document, as you encounter changes in your life, you should adjust your budget and strategy accordingly," he added. "Make it your own, hold yourself accountable, and design a realistic strategy for yourself."

Footnotes

 

[1] College Board. Average cumulative debt of bachelor's degree recipients. Available at https://research.collegeboard.org/trends/student-aid/figures-tables/average-cumulative-debt-bachelors-degree-recipients#:~:text=In%202017%2D18%2C%20average%20debt,dollars)%20in%202012%2D13.. Accessed July 28, 2020.

[2] Barry Garapedian. Business Facebook. https://www.facebook.com/BarryGarapedianMS

[3] Trulia. Many Colleges Miscalculate Off-Campus Housing Costs. Available at https://www.trulia.com/research/campus-housing/. Accessed July 29, 2020.

Barry Garapedian is a Financial Advisor with the Global Wealth Management Division of Morgan Stanley Smith Barney in Westlake Village, California. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member SIPC, or its affiliates.

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