31 Mar Making ¢ents: How to Create a Shoebox Budget
by Abril Hunt, Senior Financial Literacy Trainer, ECMC
Running out of money is one of the most common reasons students come into our offices. They have had little to no exposure to budgeting or paying bills. College students owe almost half of the nation’s $285 billion credit card debt. In fact, the fastest growing group of bankruptcy filers are people 25 years of age or younger.
When coming to college oftentimes students don’t understand how financial literacy is connected to more than just a savings account. College is expensive. It’s important that students understand the choices they make today will impact the rest of their lives.
The most important step in getting a hold on one’s finances is to set up a budget. But the truth is that people have no idea where to start. Sure, there are tons of resources on how to build a budget on the internet, but the templates don’t always fit each individual lifestyle, the calculations can get complicated and the whole process ends up becoming way more intimidating than it should be.
Most personal finance books will tell readers to sit down and come up with a dollar limit for all aspects of their lives right off the bat. This advice is especially pointless for new budgeters because in order for them to set a realistic goal, they need to know how much they’re spending right now.
Enter the idea of a shoebox budget—it’s simple, practical and efficient. To begin, just grab two shoeboxes, a notepad and a pen.
Step one: Save your receipts
Get a shoebox or other container and create a pile for money coming in and a second pile for money going out. The “in” pile includes paychecks, pay stubs and other income; the “out” pile should include checks, bills and receipts.
Every single penny spent or earned must be documented in some way. Save all bill statements and receipts, and keep copies of all checks written and debit card transaction. At the end of each day, put all notes and receipts into the appropriate shoebox. Continue this for one month.
Step two: Sort your receipts
Group your expenses in “like” piles, such as transportation, food and clothing. Choose categories that reflect your spending habits.
Step three: Add up everything
Once you’ve added all your categories individually, add them all together. Do the same thing for your earnings for the month. These two numbers indicate where you stand financially. Hopefully you’re spending less than you earn.
Step four: Try to reduce your spending
When your expenses are categorized, it’s much easier to go through them and see where you could be saving money. Be realistic. Some categories are easier to modify than others. The key is finding little manageable things that you can do to curb your spending.
Step five: Set your budget
Start by writing out the categories for the next month and include the amount spent during the current month. These will be your target numbers for the next month. Also, try to add an additional category called “flexible,” and give it a dollar amount equal to 5% of your earnings. This is the money you can use to cover any unexpected expenses next month. At the end of next month, if you have any money left over in the flexible category, put it into a savings account.
Step six: Try it
For the following month, do everything as normal. The budget you’ve created should be pretty realistic, so you should be able to meet your goals.
Make it a habit to go over your budget at the end of each month. See whether or not you’re making your targets. If you are, take your surplus money and create a new category—savings!
Don’t be afraid to adjust your numbers. If you’re struggling in a category, adjust that number upward and lower the amount that you’re putting into savings. Even if you can’t put away a ton of money, it gets you in the habit of saving something.
Most students don’t expect the standard of living they enjoyed while being supported by their parents ending quite so quickly. That’s why understanding how to manage their money (or lack thereof) is so vitally important.