The first step to creating a budget is to outline your financial goals. Students often think the goal of a budget is to cut out all spending and eliminate their weekly latte habit, but budgeting is ultimately aligning someone’s spending with their values and goals.
- Financial goals can be lumped into three broad categories: accumulation, debt reduction, and consumption. Accumulation goals involve saving a certain amount of money. This might include saving money for an emergency or a down payment on a large purchase. Debt reduction includes reducing or eliminating debt. Consumption goals are related to purchasing an item or experience.
- Financial goals are best when expressed in the SMART formation. Specific, Measurable, Attainable, Relevant, and Timely. In short, you should set realistic financial goals with a specific time-frame and dollar amount.
- Once your goals are in this format it’s very easy to add them to your budget simply by dividing the amount needed by the number of months you have and establish a monthly savings amount. If someone wanted to save $1,000 a year from now they’d need to save around $83 a month. A second year student saving to buy a car after graduation would need to $111 a month to have $4000 at graduation.
- Consider automating your savings by splitting your direct deposit between a savings and checking account. Another option is to step automatic transfers between checking and savings on a monthly or weekly basis.
Examples of goals from each type
- I will set aside an additional $100 monthly on my student loan payment to be debt free by 5 years after college.
- I will save $5,000 for an emergency by October 1, 2023 by putting $139 per month in my savings account.
- I will have $700 for a summer road trip by May 1, 2021 by saving $100 per month.