2 Why Budget? Budgeting as Spending Plan*

Learning Outcomes:

• Learn how to borrow effectively and save over time.
• Explain the concept of price and how it relates to planning a budget.
• Learn how to create a solid financial plan.
• Set effective goals and differentiate goals in terms of timing.
• Know what a checking account is and how to open one.

What You Should Know Before You Start A Budget

Saving and Borrowing 

• Watch this video:

• Answer these practice questions.

Budget as Spending Plan*

Choose a Tool to Help You Manage Your Budget

To create a budget, you’ll want to use a tool for tracking your income and expenses. You can use pen and paper, a simple automated spreadsheet, or a budgeting app. Many banks offer budgeting tools, so see what works best for you.

The Financial Awareness Counseling Tool (FACT) is a free interactive tool that can help you manage your finances. FACT covers topics ranging from managing your budget to avoiding default. Plus, you can access your loan information and receive personalized feedback to help you better understand your financial obligations.

Review Your Monthly Income

First, estimate how much money you will have coming in each month. Here are some tips for assessing your income:

• Your income may come from sources such as your pay from work, financial contributions from family members, or financial aid (scholarships, grants, work-study, and loans).
• If you’re working while in school, review your records to determine how much your take-home pay is each month. If you earn most of your money over the summer, you may want to estimate your yearly income then divide it by 12.
• Include income from any financial aid credit balance refunds—money that may be left over for other expenses after your financial aid is applied toward tuition and fees.

Monthly Income Tracking Example

*Note: If you are getting ready to attend school, you’ll want to estimate your federal aid credit balance by taking your estimated financial aid and subtracting your expected tuition and fees. If you have not yet received an aid offer from your school, you can use FAFSA4caster to get an early estimate of your eligibility for Federal Student Aid. 

Identify and Categorize Your Expenses

To estimate your monthly expenses, you’ll want to start by recording everything you spend money on in a month. This may be a bit time-consuming but will definitely be worthwhile in helping you understand where your money is going and how to better manage it. After that, gather your bank records and credit card statements that will show you other expenditures that may be automatically paid.

If you are currently attending college or career school or getting ready to go, you’ll also need to estimate your college costs. In addition to tuition and fees (unless covered by financial aid), you’ll want to make sure to include books and supplies, equipment and room materials, and travel expenses. Find details on what’s included in the cost of college and tips on how to reduce college costs.

If you are still researching your school options, keep in mind that college and career school costs can vary significantly from school to school. We have resources to help you estimate and compare school costs.

Once you’ve identified your expenses, you should group them into two categories—fixed expenses and variable expenses.

• Fixed expenses stay about the same each month and include items such as rent or mortgage payments, car payments, and insurance. These obligations are generally nonnegotiable until you realize that you are spending too much money on rent and take steps to find a cheaper place! When creating a monthly budget, divide the amount due by the number of months the bill covers. For example, take your yearly $1,200 insurance bill that’s paid in two $600 installments six months apart, and divide it by 12 to know you need to set aside $100 per month.
• Variable expenses are those that are flexible or controllable and can vary from month to month. Examples of variable expenses include groceries, clothing, eating out, and entertainment. You’ll want to examine these expenses to make sure they stay under control and don’t bust your budget at the end of the month.

Monthly Expenses Tracking Example

Evaluating Alternatives and Making Choices

Figuring out how to go from here to there is a process of identifying immediate choices and longer-term strategies or series of choices. To do this, you must be realistic and imaginative about your current situation to see the choices it presents and the future choices that current choices may create. The characteristics of your living situation—family structure, age, career choice, health—and the larger context of the economic environment will affect or define the relative value of your choices.

• Watch this video:

• Answer these practice questions.

Budgeting Apps

For budgeting apps, see Financial Technology (FinTech) Products and Banking Arrangements chapter.

Saving your Money

As a student living in an expensive city, you may have to think about where to save your money securely and what accounts will help manage your money more easily. The two main types of financial institutions in the United States are banks and credit unions. While not having an account at a financial institution may not seem like a big deal, it can have serious implications that impact your financial well-being. Unbanked and underbanked individuals often find themselves using riskier alternatives to manage their finances and borrow money. These alternatives can cost consumers big bucks in check-cashing fees and high-interest payday loans.

Things to consider when looking for a credit union or bank:

• Are they accessible? Do they have branches in my community?
• Do they have surcharge-free ATMs near me?
• Do they charge fees for transfers or going below a certain monthly balance?
• Do they have a monthly maintenance fee?
• How quickly do checks clear?
• Do they have mobile banking services?
• Will I get alerts if there is a low balance or suspicious account activity?
• Do they have 24-hour service by phone or chat?
• Do they have multilingual services? Do they have services for members with disabilities?
• Do they offer remittances (also known as money transfers) if I need to send money internationally?
• What is the cost of an overdraft fee? Do they offer peer-to-peer payment services if I want to send money to another account holder or someone outside the financial institution?
• Do they include members or consumers in their business model?
• Do they value my business?

Savings and checking accounts are typically the first step in establishing a financial foundation. These accounts are held at financial institutions that allow you to deposit and withdraw money while keeping a record of what comes in and goes out. The primary goal of a savings account is to help you put aside money for specific goals, long-term goals like retirement goals, and emergencies. Checking accounts are typically used for everyday expenses; you use these accounts to buy groceries, a Metrocard, concert tickets, clothing, etc. You may also use these accounts to pay bills such as your rent or mortgage, gas and electric bills, or car payments. Some people find it easier to manage their money by having more than one checking account so that money is set aside for bills in one account and miscellaneous expenses can come out of another account.

Checking accounts also come with certain benefits that make managing your money easier. The benefits of these types of accounts include:

• easy access to your money, since most checking accounts provide diverse access to your money via automated teller machines (ATMs), branch locations, and mobile banking tools;
• ATM cards that allow you to get cash and make deposits at walk-up and drive-through kiosks and indoor branches;
• debit cards which allow you to access your money electronically, with or without physical money;
• statements that serve as a record of how your money exists within your account; and
• a transfer option that transfers funds to other accounts, account holders, and accounts at other financial institutions. Please note: These transfers may be free but some have fees.

Financial institutions may offer checking accounts that pay interest, but usually at very low rates. These accounts often have higher fees than checking accounts that don’t pay interest or those that require a larger minimum monthly balance. Read the terms and conditions carefully to see if the interest you earn will outweigh the fees you must pay.

Ask your bank or credit union representative about the following:

• the minimum balance required to avoid monthly service fees;
• monthly service fees;
• direct deposit and whether it eliminates the monthly fee;
• per-check or transaction fees;
• fees associated with use of automated teller machines (ATMs);
• online and mobile banking access and any costs;
• online and mobile bill pay access and any costs;
• how to avoid overdraft fees; and
• low balance alert notifications.

(Consumer Financial Protection Bureau [CFPB], 2024; National Credit Union Administration [NCUA], 2024)

Understanding a Check

Banks and credit unions make checks available to account holders, usually at a cost. You can order a “book” of checks mailed to you. Here are the basics of a check:

1. Your name and sometimes your address and phone number are printed on the check.
2. The check number helps to identify which check in your checkbook has been written.
3. Your bank or credit union information appears on the check..
4. The routing number and account number help to identify the financial institution and the account from which money is being withdrawn.
5. The payer writes the date of the check.
6. The “Pay to the Order of” line is where you write the name of the person or company to whom you will give the check. After writing the name, you can draw a line to the end to prevent anyone from adding another name to your check.
7. Write the dollar amount of the check as a number, such as $19.78.
8. Then write the dollar amount of the check in words, such as “nineteen ————- 78/100” dollars. Drawing the line shown in the example prevents another person from adding a different or additional dollar amount after what you have written.
9. The memo section is optional. You can use this area to remind yourself why you wrote the check or to record the account number of the bill you are paying.
10. The signature line is where you sign the check, indicating that you approve this payment from your account.
11. There is also important information printed on the back of your checks: The back of the check has an endorsement area for the payee. Endorsing a check means signing the back to make it “cashable.” For example, if you write a check to your friend, your friend would endorse the check to get the cash or deposit the amount into his or her account.

(CFPB, 2024)

How to Write a Check

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How to Endorse a Check

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