While budgeting itself is usually only in the news around the New Year and resolution time, it has been in the news recently because our current environment of high inflation makes budgeting critical to one's financial health.  Yet, a Fidelity Investments survey found that 57% of young people dread budgeting. How do we convince students to get on the budgeting train? This update may give you some ideas.

Budgeting is a Critical Skill Today

In the current inflationary environment, budgeting takes on a more important role in successfully managing your money. Higher prices and rising interest rates are causing consumer confidence to drop, (USNews) and even seasoned budgeting veterans need to repeatedly revisit their budgets and make adjustments.

Many economists have been concerned that rising food and energy costs may lead lower income people to use credit cards, which now carry higher interest rates, to cover the shortfall. Gasoline jumped to 9.8% of total card purchases for lower income people last month, up from 7.7% the previous month. But Bank of America evaluated their customers’ debit and credit usage and reported the following and did not see evidence that lower-income customers were shifting to credit card from debit cards. Perhaps they still have stimulus funds on hand to help. (Fortune)

But for many people, particularly those with lower incomes, inflation may overpower any budget. GoBanking Rates and CBSNews offer suggestions on what to do if you find yourself in this situation, from pooling resources with others in your family/community, to finding extra work to calling 211 or using 211.org to find support services in your area.

Budgeting Guides and Methods

The detailed guide to creating your first budget from college senior Sabrina Jeon is directed to other students about to enter the real world in a series by CNBC. She defines categories, suggests how to set up an initial budget (she suggests using a spreadsheet), and includes strategies for building that first budget. The article also gives advice from other students on techniques to not overspend and how to increase savings, discusses the importance of an emergency fund, and explains why learning to save early is so important.

Another quick-start budgeting guide for beginners was published in the Roanoke Star.

Even the Wall Street Journal tackled budgeting methods recently in its BuySide publication and reviewed the five most popular budgeting methods (subscription may be required). The article comments on how each method works, what type of person would benefit from using it, what financial experts think of it, and what the author thinks of it.

The first one covered is the popular 50-30-20 method. This one is good for folks with a steady income. However, if you live in an area with really high housing costs, it may be impossible to keep your necessary expenses within the 50% target. Housing costs alone will likely consume 35-40 percent. And you may need to save more than 20% if you dream of owning a home someday.

The next method discussed is the 70-20-10 method. The 20% is consistent with the first method—for savings. The 70% is supposed to cover all of your monthly expenses, and the final 10% is for donating or paying down debt. This method seems to be most appropriate for those with consistent income and no tendency to overspend, or for those people for whom a 10% donation target is important.

Third on this list is the zero-based budget. This one will require a spreadsheet or an app to help you track expenses over a couple of months, and then create a budget where every dollar of income is allocated to a spending category, including savings. The suggestion is that you list all of your spending categories (at whatever level of detail you choose) in priority order. The reason for doing this is so that if you go over budget one month, you simply adjust your budget for the next month by leaving off the category(ies) at the bottom of your list. This method can be really tedious for most people, but it was suggested that everyone go through this exercise when they are starting out to get a good feel for where their money is being spent.

The fourth method reviewed was the cash envelope method. You allocate your monthly net income across spending categories by putting the cash amount into an envelope for each category. If the cash is gone, you can’t spend anymore in that category until the following month. If cash is leftover for any given month, you have more to spend the next month. (There are apps that allow you to do this cash method without cash.) This method is excellent for anyone who tends to overspend or pull out a credit card and keeps you from making impulsive purchases. I have personally used this method when I have been in a tight financial position.

Finally, the pay-yourself-first budget was reviewed. In this case, you have all of your savings taken out of your paycheck and directly put into your retirement and other savings/investment accounts, and are free to spend the rest on needs and wants. This is certainly the least time-consuming method, but would only be good for those who are able to consistently cover their monthly expenses and have the discipline not to make impulsive and unplanned purchases, using either credit cards or readily dipping into savings for things they can’t really afford.

Her Money’s budgeting advice focuses on the 50-30-20 method, and considers this method to be a good basis for an overall financial plan.

Would your students benefit from knowing what mistakes are often made with budgeting as a way to avoid them? A local news station (WTOP) reviewed a US News article on the topic. Here are the top mistakes listed:

— Setting unrealistic goals.

— Forgetting to factor in rising prices.

— Making your plan too rigid.

— Doing it alone.

— Ignoring online resources.

— Not budgeting for impulse purchases.

— Failing to save.

— Maintaining unaffordable fixed expenses.

— Using your gross income.

— Not having a budget at all.

Are Budgeting Apps the Key to Success?

While there may not be any remarkably new approaches to budgeting, the key to following any budget might be choosing an app that is a good fit. And an app may make the whole budgeting exercise much more palatable, especially for the young people who apparently dread the thought!

The Fidelity Investments survey mentioned at the top of the article had some interesting results (Motley Fool):

• 54% of young adults think it's easier to follow a strict food diet than a monthly budget
• 57% of young adults dread the thought of budgeting
• 1 in 3 surveyed would rather deep clean their bathroom than check their savings account
• 1 in 4 surveyed would rather run a 5K on Thanksgiving morning than cut back on spending

In addition to finding an app to help, the article suggests that you take time to learn how to do it well, and make changes as necessary. Automate as much of your savings and regular monthly expenses as possible, and leave yourself room for some amount of free or impulsive spending. Feeling deprived will lead to an explosion at some point in time with unfortunate outcomes.

How do you pick an app that will work for you? ZDNet evaluated the top five apps including costs and suggestions for which financial goals each one is best geared towards. Mint, which is free, comes out on top overall. Goodbudget would be a good selection if the envelope method is what you need. Personal Capital would be a good choice for anyone focusing on investing. Pocketguard would be helpful for anyone who needs to closely track their spending categories and tends to overspend (Zero-based budgeters.) And You Need a Budget (YNAB) was recommended for the most serious budgeters.  

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.

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