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Telling Your Money Where to Go

Budgeting makes it possible for you the have enough money to do things you want. By preparing a proper budget you can set money aside for every paycheque for your big-ticket purchases. As college students we have a lot to worry about from maintaining our grades to applying to different programs, budgeting is not one of our priorities. I want to provide some solutions that don’t require much maintenance and will take some of the stress away from managing your money. You will be able to keep track of where every dollar is going and streamline it towards where you want. 

The first step everyone should take is to review your last month’s bank statement (If you’re feeling especially inspired you can do this for the whole year). Find the items where you spend the majority of your money and identify any areas that are especially of concern. As a society, we have a very big problem that is summarized perfectly by Joshua Fields Millburn of “The Minimalists” (Brandon’s paraphrased version) “We make good money but we spend even better money.”

It is important to not only find areas where you enjoy allocating your money but also identifying areas where you can potentially cut back. My favorite quote on budgeting comes from Ramit Sethi “Spend extravagantly on the things you love, and cut costs mercilessly on the things you don’t.” To be able to spend money on the things we want we also have to be able to make some sacrifices. 

Techniques

Once we have identified areas where we allocate our money we begin to budget for those expenses. The most important part of this process is self-discipline, as people, we are very good at convincing ourselves that we need something. In reality, we don’t.  There are a few techniques for this part. 

  • Envelope Method 
  • Incremental Budgeting 
  • Automation

Envelope Method

The Envelope method is probably the method the requires thAT most work. First, decide the categories that you will be spending your money on. Then decide the amount of money you are going to allocate to each category.  Once you have decided, place the physical amount of money into envelopes with the appropriate labels. Every time you go to buy clothes, groceries, gas take the envelope and only spend what is in it. 

When the money is done it’s done.

If you are to need more money you would relocate some of the money from one envelope to another. An example being you have used up your gas money for the month but you still need more gas. Take money from your clothing allowance and use it for gas. 

If you don’t care for the physical envelopes we will discuss a digital method later. 

Incremental Budgeting 

The incremental budgeting method (My favorite method) requires a bit of upfront work but is then pretty sustainable afterwords. It requires you to analyze your spending from the previous year and cut down your spending by a percentage. Through this method, you’ll quickly realize that we don’t need to spend nearly as much as we do. 

That money you save can be put towards your big-ticket goals are simply redistributed back into areas you enjoy. If buying shoes is your thing a portion of the 5-10% that you cut from your budget can be put back into buying shoes (given you’ve paid yourself first). 

We can also begin to plan for future expenses. if you are anticipating having to take out money for student loans you can put the money towards that. If you plan to get a car within the next 5 years let’s save up for it now. Putting in preventative measures to avoid debt will have your future self-loving the person you are now. 

Automation

The automation technique is less about budgeting and more about making your life easier. This technique can be implemented in the previous ways of budgeting. It entails setting up automatic transfers from your chequing account into various other accounts. In this way, we can reduce the risk of carrying around physical cash and reduce the urge to spend money. 

It is completely up to you once you have established your emergency fund how you want to set this up. If you are saving up for a big purchase down the line (5 or more years) you could tie your money up into index funds, mutual funds, or bonds (we will talk about these at a later date). If you need it in less than 5 years you can simply put your money into a savings account. This savings account shouldn’t be directly connected to your chequing account in any way to make it more difficult for you to transfer over a couple of dollars for a not-so-smart purchase. Instead, make it accessible but difficult to get the money. I personally do this by having my two accounts at two different banks, by doing this it requires 1-3 days for my money to be transferred from my savings to my chequing. 

Once you set up the groundwork for the transfers determine what money is going where and how much of it. The money left in your chequing account can be used for the fun items you’re going to purchase during the month, eating out, clothing, etc. 

Setting up a budget is a big step to financial stability that not many people take. By doing this you are already ahead of a lot of people. 

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