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Here is the second episode of The College Student's Guide To Money! In this episode, Chelsea walks you through everything you need to know to make your first budget, no matter how much money you have coming in.

How to make a budget spreadsheet: https://thefinancialdiet.com/10-easy-steps-to-creating-a-budget-spreadsheet/

The 50/20/30 rule: https://www.thebalance.com/the-50-30-20-rule-of-thumb-453922

The number everyone should know even if you hate budgeting: https://thefinancialdiet.com/number-absolutely-know-even-hate-budgeting/

The Financial Diet site:
http://www.thefinancialdiet.com

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[MUSIC PLAYING] So the first topic we want to cover here when it comes to getting good with money is how to budget.

Now, this is probably the most important topic that you will ever learn about when it comes to money. And one of the things that you will have to get comfortable with before anything else can happen.

There are tons of different strategies out there for how to budget and how to make the most of your money. And some of them are more hands-on than others. But as I mentioned in the intro, the most important thing here is that you do cannot wait to have a lot of money in order to start budgeting it.

If you only have $10 a month, you need to account for every one of those $10-- where they're coming from, and where they're going, and then what you want to be doing with them. But let's do a quick, basic definition of a budget. A budget is an estimate of your income-- the amount of money you're bringing in and have available to spend, save, or invest-- and your expenses-- all the things that you need to spend money on.

It can be as simple as a piece of paper split into two columns, where you jot down all of your paychecks, gifts, and so on in one column-- and all of your bills, purchases, grocery costs, and so on in the other. They can, of course, also get much more complicated than that or can be automated through various apps and programs that help sort your budget for you. And just like there are many different ways to track the nuts and bolts of a budget, there are also many different philosophical approaches to budgeting.

Some people approach budgeting with a straightforward Pay Yourself First strategy, where they set aside money first thing every month to be saved before sorting out all of the other money into different categories. Others practice something called Zero-based Budgeting, where every single dollar is assigned a category with nothing left over at the end of the month. These strategies are a bit more involved, but they can easily be mastered once you've gotten used to the basics of understanding your budget.

If you aren't sure of where to start with budgeting, try keeping a money diary or writing down every purchase that you make for a given period of time. It will help you start to understand patterns in your spending, so you can get an idea of how much money you want to be dedicating to each category, as well as some of the things that you probably want to cut out. But no matter your individual strategy, the most basic thing to keep in mind about a budget is that, simply put, your expenses should not exceed your income.

You want to finish every month in the black, meaning that you have money left over with which to save or invest-- but more on that later. If you're spending more than you're bringing in, that means you're in the red for the month, or that you've spent more than you've earned. And you may still owe that money, like on a credit card or to someone you might have borrowed it from.

The most traditional budget there is what we mentioned before, a simple list of the money coming in compared with a list of the money going out. You record your income and assign it a category-- things like scholarships or bursaries, student loans, paychecks, parental contributions, gifts, et cetera. Now, there are many ways to budget this income depending on how hands-on or hands-off you want to be.

Some people swear by the old-school Google Sheets method, of which there are plenty of examples including on the Financial Diet. But others, myself included, prefer apps like Mint, which help automate the categorization and analysis of all of your different spending and income. Others still prefer to use a literal pen and paper because they find that actually writing these things out and doing the calculations themselves helps keep them accountable and very aware of every single line in their budget.

No matter which method you pick though, you'll generally have some basic categories of expenses that you'll need to track-- things like rent, bills such as your internet or cell phone, transportation costs, food categories, et cetera. And from there, you can get even more granular if you're trying to see exactly where your money goes-- categories that tally up just things like coffee expenses or purchases for a specific hobby. In a traditional budget, each category is assigned an amount per month.

And you may vary month to month in terms of exactly what you're doing within that category. But the idea is, you never exceed the amount in any given category, which helps keep you under budget overall. And if you want to stick to a categorical budget but simply don't trust yourself if you're not actually budgeting with the physical money itself, a similar but very tactile budget strategy is called the Envelope Method.

You literally take a stack of on envelopes labeled with your expense categories. And whatever money you put in each of those envelopes is the only money you can use for that category that month. The Envelope Method is obviously rather labor-intensive.

But many people do find it very helpful to totally realign how they think about money and start fresh on a very accountable budget. Also keep in mind, for big recurring expenses like your rent or utilities, you may not want to keep them in envelopes. You may want to just simply automate those bills out of your checking account, so you don't have so much cash on hand all the time.

Another popular budgeting method is the 50/30/20 rule. The bare bones of it is that 50% of your income should go to necessities-- we'll get there-- 30% goes to things that you want, and 20% goes to savings or paying off debt. And some people do prefer to swap those last two.

So 20% is going to wants and 30% to savings. And this is a very effective way for many people to budget because it's a zero-sum budget, meaning that every single dollar is allocated. But it's also a bit inflexible.

Because, for example, you may live in a place where it's not realistic for your total necessary purchases each month to fall under 50% of your take-home pay. Here in New York, for example, you'd have to be earning quite a lot in order for that to be the case. But then comes perhaps the most difficult part of budgeting, especially if you're someone, who like me, has a tendency to slip into that treat-yourself mentality or confuse things that are nice to have with things that are need to have.

And that is understanding the difference between necessary and unnecessary expenses. Especially when you're in a time that you need to be really focusing on savings and ramping up the amount that you're able to put away each month, becoming very, very clear and tactical about really separating necessary versus unnecessary is of the essence. So you have to be super honest with yourself.

What are the basics that you need to get by each month? There should be a basic minimum grocery bill, things like your rent-- although in many cases, you could arguably find a different living situation in which your rent would be lowered-- things like your basic utilities, internet, cell phone, et cetera. And once you have identified in a very honest and clear way what your absolute necessary expenses are, those need to be taken out of your budget first and foremost.

By subtracting this amount from your monthly income, you get a clear number of what you have leftover for everything else. And that everything else has to represent both your unnecessary expenses and your savings slash debt repayment slash investing. And don't get me wrong-- unnecessary expenses doesn't mean you will never buy or pay for these things.

It just means that when push comes to shove, they do not absolutely need to be included in your monthly budget. Things like going out to dinner with your friends, subscriptions, gym memberships, fitness classes, hobbies, coffee out, that kind of stuff can be categorized as unnecessary, even if most months you end up paying for them anyway. And again, remember that whatever is left over in your budget after subtracting your absolute necessary expenses are going to be competing for space.

The more of those unnecessary expenses that you're paying for each month, the less that you'll have to go to savings, or investments, or things like debt repayment. So make each dollar count in that category. And the best way to get a really clear picture of what your actual necessary versus unnecessary expenses are is to get really good about tracking your own spending and getting a very clear picture of your lifestyle and what it costs to live it.

This is part of the reason why one of our first tips on this topic was to start with something like a money diary or writing down everything you spend on for a month or so. Often, when we're setting out a budget for the first time, especially if we really want to cut back or save a lot, we have a tendency to wildly underestimate how much we realistically spend in certain categories each month. And it's much better to make a realistic budget from which you can slowly start to chip away than to try and radically alter your spending in a way that doesn't match up with your lifestyle, where you'll inevitably probably fail at the budget and then, in many cases, just stop trying altogether.

Understanding how much you tend to spend at the grocery store every month, as well as doing a very clear inventory of which of your more regular bills you could probably cut back on versus the ones that need to remain the same is going to be extremely important to getting a realistic budget. For example, you may be someone who uses your cell phone all the time for both work and personal use. So for you, it's much more important to just go ahead and pay for that more expensive unlimited monthly plan than to try and radically lower your monthly cell phone bill to a point where you constantly end up having to pay overages each month.

From a very clear inventory of your spending and analysis of your lifestyle, you will be able to paint a very clear portrait of unnecessary versus necessary and identify the places in which you can start to make meaningful changes without radically altering your lifestyle or setting yourself up for failure. You don't have to have an incredibly strict budget in order to get control over your money. Sometimes, you're going to spend on frivolous things, or make mistakes, or buy something that you might regret.

And that's OK. What is important for everyone though is having a very clear understanding of what is coming in and what is going out. And it's also OK to experiment with different methods of budgeting, so that you can get a feel for what works best for you and what's more sustainable for you in the long term.

The power of a budget is in having control over your money. And at the very least, even if you're currently spending more than you make for various reasons outside of your control, you have a very clear mental picture of what's happening and what needs to happen in order for you to be in the black again. And again, remember that no matter how little you may be taking in each month, it is never too early to start budgeting and learning these concepts because waiting until you're rich to have a budget is like waiting until you're married to start dating.

Don't forget to check out the next episode in our guide to getting good with money for college students. And for all things talking about money, don't forget to check out the Financial Diet here on YouTube or all around the internet.