Creating and following a budget helps form good financial habits as well as develop an awareness of spending, for the purpose of reaching your financial goals. If you have never developed, or used a budget before, don’t worry! It is never too late to start, and there are many helpful tools and resources available to help get you started.
Benefits of Budgeting
The first step in creating a budget is to identify how budgeting can help you. There are many personal reasons someone creates a budget. Some common, overarching benefits of budgeting include:
- It helps you meet your expenses and creates plans to reach your financial goals;
- Short-term and long-term financial goals help create a framework conducive to financial success;
- It helps you develop a sense of control over your money;
- It reduces your anxiety levels regarding financial matters;
- It can contribute to your credit-worthiness;
- It identifies where funds should be going versus where they were actually spent, and demonstrates the importance of maintaining a balance between earning and spending.
Start by making a list of your personal reasons for creating a budget.
Establishing and incorporating your academic and personal goals with your financial goals is extremely helpful. Understanding your academic and personal goals helps you understand and identify the benefits to saving, and the long-term impact of poor money management. Most college students have academic goals of graduating within 4-5 years and establishing a career or continuing education in graduate school. Personal goals for college students or recent graduates may also include purchasing a home, a vehicle, or incorporating travel into his or her lifestyle.
Financial goals help you reach your academic and personal goals. For example, a short-term financial goal is to put a certain percentage of each paycheck you earn into a savings account to be used after graduation. Another short-term goal could be to use a certain percentage of each paycheck you earn toward your academic bill, thereby reducing the amount of loans you borrow. An example of a long-term financial goal is saving toward a down-payment on a house.
Make a list of three academic and three personal goals you want to achieve.
Example Academic Goals
- Take summer classes and graduate in 4 years, instead of 5 years.
- Work additional hours on breaks or save enough to reduce the amount of student loans you take each year by $1000.
- Complete an internship and attend job fairs in your field to gain employment following graduation.
Example Personal Goals
- Build your professional wardrobe before or shortly after graduation.
- Purchase a reliable car with a down-payment of 20%.
- Take one week long vacation to a location you have always wanted to visit.
Understanding Income and Tracking Spending
It is important to create a functional budget, one which makes sense to you and allows you to have a life, without overspending, and while working toward your academic, personal, and financial goals. In order to create such a budget, you must understand your income and how you use it currently. Some income, like your financial aid, is applied to your expenses, like tuition and housing, without coming through your bank account. Other income might come from family contributions, like your kind grandmother who gives you $20 when she sees you. The paycheck you earn from your job is also income, and it is important to think of all these sources of income when considering your budget.
You might be surprised at how much money you spend the week after you receive a paycheck. Tracking daily spending provides you with an understanding of where your money is going, and what your priorities are. Perhaps you spend $100 per week going out with friends, $30 on gas for your car each week, and the rest of your paycheck toward car insurance and your cell phone bill. Your spending habits in that scenario indicate your priority is on having a good time right now, rather than looking forward to your personal goals you want to achieve in the future. Applying a budget to the example means considering your academic and personal goals and changing your spending habits to meet them. For example, instead of spending $100 on social activities each week, take advantage of some free campus events and put $50 of that money into savings for your professional wardrobe, or future travel.
Track your spending for one week and find out where your money goes.
Creating a Budget
Creating a budget might sound overwhelming, but there are many resources available to help you in the process. Visit Federal Student Aid to get assistance through each step below.
The following steps will help you set up your budget and manage your finances to help you achieve your goals:
- Determine a time span for your budget – will you budget by week, by month, or by year?
- Choose a tool to help you manage your budget – use pen and paper, a spreadsheet, or an app.
- Review your monthly income – identify your income.
- Identify and categorize your expenses – tracking your expenditures is really helpful.
- Save for emergencies – start with $1000, then work toward six months-worth of expenses.
- Balance your budget – make sure you’re making amounts equal to, or more than, the amount you spend.
- Maintain and update your budget – not every budget will work for you forever, so revisit it often.
Understanding Your Credit Score
Also known as a credit score, your FICO score can range from 300-850; the higher the score, the better, as a higher score indicates a stronger measure of creditworthiness. Individuals can achieve a high credit score by maintaining a long history of paying bills on time each month and maintaining a low amount of debt. FICO scores are used to determine whether or not an individual is eligible to be approved for a loan, in determining an interest rate, and goods and services such as a cell phone. Download the Credit Score PDF.
Credit inquiries can impact an individual's credit score. Inquiries known as "soft hits" do not affect the credit score. Soft hits include inquiries made by an individual, such as requesting your own credit score; inquiries made by insurance companies and employers are also considered soft hits. Inquiries known as "hard hits" may affect the credit score. Hard hits include inquiries by lenders, such as credit card companies or banks, inquiries made by apartment complexes, and inquiries by retail establishments.
Improving Your Credit Score
Credit scores are calculated by using information regarding the individual's past history, amount owned, length of credit history, types of credit in use, and new credit. The chart below demonstrates harmful factors to credit scores and ways to improve.
|Credit Score Component||Harmful Factors||Ways to Improve|
It takes about 24 months to restore damaged credit from just one late payment.
|Pay on Time.|
Late payments are the most common piece of negative information on reports.
Cards with balances at their maximum credit limits lower your score.
|Pay Down Debts.|
Bring delinquent loans current.
Length of Credit History
|Closing Revolving Accounts.|
This reduces the history of your accounts and lowers available credit limits.
|Don't Close Accounts.|
Pay down or pay off credit cards, but don't close them. A closed account will still show up on your credit report.
Types of Credit in Use
|Too Many Revolving Accounts.|
Revolving credit (credit cards) reflects more negatively than installment loans (auto loans, mortgage).
Move revolving debt (line-of-credit accounts) to installment debt (closed-end loan accounts)
|Opening Multiple Cards.|
Multiple new accounts in a short period of time reflects negatively on your credit score.
|Avoid Multiple Cards.|
Don't open multiple new lines of credit in a short period of time.
Student Loans and Credit Scores
Student loans can serve to improve credit scores. Student loans are treated as installment payments, so when monthly payments are made in full, and on time, the credit report reflects that payment on a continuing 30-day basis, and communicates to future lenders the individual can be trusted to handle money responsibly.
Conversely, defaulting on a loan, or failing to make an on time, full payment, can damage a credit score, which can affect an individual's ability to gain employment, housing, and loans. If a borrower is unable to make a monthly payment, he or she should contact the lender to request a forbearance.
A forbearance is granted by a lender in certain circumstances and puts loan repayment on hold. Borrowers should note, however, even when a forbearance is in place, interest continues to accrue and borrowers may be required to make payments for the interest only. Students enrolled and attending classes at least half-time are deferred from making payments to their loan principles are interest, although interest continues to accrue for most loans. Individuals granted a forbearance or in deferment will not harm their credit scores, so it is important to remain in contact, not avoid, lenders when a graduate is struggling to make payments. Borrowers can view their loan history on the National Student Loan Database System (NSLDS).
Identity theft occurs when an individual uses your personal data such as name, social security number, bank and/or credit card information to obtain credit cards, set up cell phone accounts and more. Unfortunately, students are five times more likely to suffer from identity theft than the general public.
Reduce your risk of identity theft by following these good practices:
- Keep your personal and important information in a safe place, then shred it when no longer needed
- Store your wallet or purse in a safe place at home, a locked cabinet at work or keep it with you
- Keep your computer and mobile device up-to-date with antivirus protections
- Verify the security of the websites you visit, if you plan to share personal information on them
- Do not download attachments or click on links unless you are positive they are legitimate
- Do not carry your Social Security card in your wallet or purse — always keep it in a locked place
- Have your important mail sent to your home address
- Always keep your computer and mobile device locked when not in use
- Remove yourself from marketing lists (go to dmachoice.org)
- Encrypt all data on your electronic devices
- Be wary of WiFi and don’t use it for financial transactions
- Check consumerftc.gov regularly for the latest scams and identity theft
You can also reduce your risk of identity theft when applying for financial aid:
- Apply for aid by filing the FAFSA online at fafsa.gov
- When you exit a website where you’ve entered personal information, always log out, close the browser and delete cookies
- Do not share your FSA ID username and password with anyone (including parents, school staff, etc.) even if that person is helping you file the FAFSA
- Review your financial aid award documents, and keep track of the amounts you applied for and received
- Limit the amount and type of personal information shared over the phone
- Use strong and different passwords for all your accounts (and devices)
- Check your credit report annually
If you lose or suspect your personal and/or credit information has been stolen, report it immediately. Contact the credit reporting agencies and have a freeze put on your account so new credit accounts cannot be opened in your name. For agency contacts and additional information visit the Federal Trade Commission. Also contact your financial institution, the Secretary of State (or Department of Motor Vehicles) and the police, if necessary.
The measure of academic work accomplished each year by students attending postsecondary educational institutions as defined by the school. OU's academic year consists of 30 weeks of instructional time in which full-time students are expected to complete at least 24 semester hours.
Interest that accumulates and is paid in installments at a later date (usually when the principal becomes due) rather than on a regular schedule from the time a loan is disbursed and interest begins. Accrued interest may be compound (interest computed on the sum of the original principal and accrued interest) or simple (interest computed on the original loan principal only).
An individual's total income (wages, salaries, interest, dividends, etc.) as indicated on his or her income tax return after all allowable deductions are subtracted.
Also known as "cumulative loan limit." This is the maximum Federal Direct Stafford Loan amount, subsidized and unsubsidized, that students attending postsecondary educational institutions may borrow throughout their educational careers.
The property value and debt that must be reported on the Free Application for Federal Student Aid (FAFSA). This includes financial holdings such as cash on hand, in checking and savings accounts, trust funds, stocks, bonds, other securities, real estate (excluding the family home), income-producing property, business equipment and business inventory.
Financial assistance offered students to help reduce the cost of their postsecondary education. Types of awards include scholarships, grants, loans and work programs that are funded by federal, state and private sources. The combination of all awards is often referred to as the financial aid award package.
The report that notifies financial aid applicants of the financial assistance being offered. The award notification and accompanying instructional materials provide information on the types and amounts of aid being offered, specific loan programs, and student responsibilities and conditions that govern the awards. Students who apply for financial aid at Oakland University must be admitted before an award notification can be produced.
The combination of all the financial aid awards (scholarships, grants, loans and work programs that are funded by institutional, federal, state and private sources) offered a student to help reduce postsecondary educational costs. Also see "Award."
An individual who agrees to take on the obligation of repaying a loan and accepts the terms of the loan by signing a promissory note. Students are borrowers of Federal Direct Stafford Loans, subsidized and unsubsidized, and parents of legally dependent undergraduate students are the borrowers of Federal Direct Parent Loans (PLUS).
See "Cost of Attendance."
Capitalization (of Loan Interest)
The process of deferring interest payments as they come due and adding the accrued interest to the principal amount of the loan. Although capitalizing is a way to postpone interest payments, it adds to the amount of the principal and, consequently, increases both the interest (based on the higher principal) and the overall amount that eventually must be repaid.
Cost of Attendance (COA)
Also known as "cost of education" or "budget." This is the average cost of a student's postsecondary education in a particular enrollment period, usually one academic year, which is based on course of study, grade level, residency and other factors. The cost of attendance includes the average cost for tuition as well as allowances for room and board (on or off campus), books and supplies, and miscellaneous personal expenses. It also may include other elements such as transportation, dependent care and study abroad program expenses. The figure is used to determine a student's eligibility for financial assistance.
The failure of a borrower to repay a loan according to the terms agreed to in the promissory note. Usually default is established once loan payments are more than 180 days past due. Defaults are recorded on a borrower's permanent credit record and can result in serious legal consequences.
A limited and specified period of time that a borrower of a federal educational loan is not required to make regular monthly payments. Interest payments may or may not be postponed depending on the type of loan. To qualify for deferment, the borrower must meet at least one of the requirements established by law. Deferment is not automatic, and the appropriate loan agency must be contacted for more information.
The failure of a borrower to make a loan payment by the due date. Delinquencies greater than 30 days are reported to national credit bureaus.
The process which financial aid and loan funds are applied toward a student's postsecondary education and related living expenses. Any credit balance in excess of charges is refunded to the student to be used for other educational expenses.
Expected Family Contribution (EFC)
Also known as "family contribution." This is the dollar amount the federal government expects a student (and parents, if dependent, or spouse, if married) to contribute toward postsecondary educational expenses for one academic year. This is computed using a formula based on the income and asset information reported on the Free Application for Federal Student Aid (FAFSA). This dollar amount is made up of two components: the parent contribution (if the student is dependent) and the student contribution. The EFC is used by schools to determine the type of financial assistance for which a student is eligible.
See "Free Application for Federal Student Aid."
The general term that describes the financial assistance offered to students to help reduce the cost of their postsecondary education. It is meant to supplement what the student (and parents, if dependent, or spouse, if married) is expected to contribute toward educational expenses. Financial aid programs include scholarships, grants, loans and work programs that are funded by federal, state and private sources.
The difference between the cost of a student's postsecondary education and the dollar amount the federal government determines from data reported on the Free Application for Federal Student Aid (FAFSA) that a student (and parents, if dependent, or spouse, if married) can contribute toward that cost. Eligibility for need-based financial aid programs is determined using the resulting figure.
The standard federal form students attending postsecondary educational institutions must complete each academic year to be considered for financial aid. This form collects income and asset data to determine the family contribution figure. Once an applicant submits the FAFSA to the federal government's processing center, data is prepared for release to the schools and state agencies listed on the application. Those schools and agencies then determine the student's financial aid eligibility. Students might be permitted to file the Renewal FAFSA if a FAFSA was filed the previous academic year. The renewal form contains preprinted data with responses from the prior year as well as other items that must be updated with current information. If a student qualifies to use the Renewal FAFSA, the federal government will notify the student by mail in December or January for the following academic year.
Funding for postsecondary education, usually awarded on the basis of need, that does not require repayment or a work obligation. Federal Title IV grant programs include the Pell Grant, Supplemental Educational Opportunity Grant (SEOG), and Federal Work-Study Grant.
A legally binding contract between the U.S. Department of Education and the borrower that contains the terms and conditions governing all the borrower's Federal Direct subsidized and unsubsidized loans, including repayment obligations. The master promissory note is valid for 10 years from the date it is originally signed.
National Student Loan Database Service (NSLDS)
A federal government database with the federal Pell Grant and educational loan borrowing history for every student. Schools must add any mid-year transfer students to their monitoring list to receive changes in aid information that may impact aid eligibility for the current year.
Also known as the "Title IV Code" or "Federal School Code." The U.S. Department of Education assigns this federal identification number to postsecondary educational institutions. OU's school code is 002307.
Selective Service Certification
Documentation that must be collected to verify all male students, ages 18 through 25, are registered with Selective Service. Male students attending postsecondary educational institutions must register with Selective Service before receiving federal financial aid.
The process the U.S. Department of Education uses to make sure information reported on the Free Application for Federal Student Aid (FAFSA) is accurate. Technical and administrative procedures are used by postsecondary educational institutions to detect and resolve inaccuracies in the data supplied on the FAFSA. Usually evaluation of tax and asset documentation is required.