How to set up a budget: An easy guide for college students and recent grads

This story is part of CNBC’s College Money Guide 2023, a series to help students and recent graduates understand their money and start their adult life off on a solid financial path.

A lot of students are unprepared for one major thing when they go off to college: how to manage their own money. But starting good money habits in college is crucial to setting yourself up for financial success in life. And that means setting up — and sticking to — a budget.

“Transitioning to college is a significant milestone for most young adults, as it marks the first time they are truly away from home and have the opportunity to make financial decisions on their own,” said Winnie Sun, managing director of Sun Group Wealth Partners in Irvine, California. “Hello, adulting!”

More from Personal Finance:
Job hunting tips for the class of 2023
This strategy could shave thousands off college costs
How to understand your financial aid offer

College students consistently cited money as the aspect of college life they felt least prepared to tackle, in a survey of more than 20,000 college students by Everfi. Just 33% answered that they felt prepared to manage their own money. And only about 40% said they had ever set up or used a budget.

Yet you need money for everything from buying your books to going out to eat. And if you took out student loans for thousands of dollars, those are contracts you signed, and many of those loans are going to start coming due about six months after graduation.

So, college is the time to set yourself up for success.

“It’s crucial to understand how money works and practice good financial habits,” said Sun, who is a member of CNBC’s Financial Advisor Council. “After all, money is the ‘tool’ that will help you move from where you are today to where you hope to be in the future, achieving your financial goals.”

Here are five key steps to setting up a budget.

The first step to getting a grip on your finances is to know your numbers.

Figure out:

• How much money you have coming in every month.
• What your fixed expenses (housing/rent, phone, tuition, books, etc.) are.
• How much, on average, you spend extra per month (food, clothes, going out, etc.)
• What’s left over (savings).

A lot of college students think — “Oh, I don’t have a lot of money, so I don’t need a budget.”

Not true!

That’s actually when you need a budget the most — so you can start building solid financial habits that will set you up for the rest of your life.

Whether you have a part-time job in college and are getting a regular paycheck, or you’re living off of a lump sum from financial aid, loans, gifts from birthdays or money you saved up from that summer job — you have money and you have to make sure it covers your living expenses, plus leaving a little padding for unexpected expenses like a flat tire, a busted laptop or an unexpected trip home for a family emergency.

You don’t think about these things because generally it was your parents’ responsibility to handle the budget and cover emergency expenses but now — that’s on you.

Certified financial planner Stacy Francis, founder of Francis Financial in New York and nonprofit financial literacy initiative Savvy Ladies, said one of things she sees college students get wrong about money all the time is that they behave like they have blinders on, focusing only on what’s in front of them — and not looking to the future.

Then, “when you do look up, you’re going to find yourself unable to pay your bills, your student loans, your credit-card debt and having to move back home with mom and dad until you do,” said Francis, who is also member of CNBC’s Financial Advisor Council. “I don’t know many college students that want to move back with Mom and Dad!”

So, bottom line: You need a budget.

Setting up a budget isn’t as hard or cumbersome as you think. It’s pretty easy — and it doesn’t have to take a long time.

I’m going to guess that most of us spend more time complaining about money than it would actually take to set up a budget to get more money.

We also spend a lot of time stressing about money and how we don’t have any (I see you, broke college student) but if you take a few minutes — say, the time it takes to watch a few TikTok videos — to set up your budget and learn a little bit about money, you can alleviate all that stress and instead, watch your money grow, which is very satisfying.

Satisfying or stressful? Seems like a no-brainer. But that is all up to you.

One popular formula for budgeting that Francis recommends is the 50-30-20 rule. That means 50% of your income goes to your basic living expenses, 30% goes to discretionary/fun stuff and the other 20% goes into savings or investments.

Generally, that means you start by putting the 20% away in a savings account like a high-yield savings account (right now, the top accounts are earning 4% to 5% interest, according to Bankrate) with the aim of not touching it unless you absolutely need it for an emergency expense. And, if you keep money in there and really try hard not to tap into it, you will be surprised at how it grows, thanks to something called compound interest.

Maybe $100 a month or 20% of your income sounds a little steep right now. Save whatever you can — $10, $20 a month. What’s important is that 1) you are saving money and 2) you are building a habit of saving money. Automate it, where it automatically comes out of your paycheck and into your savings account, and you will get to a point where you won’t even miss that money. But you will be pleasantly surprised when you see how it’s grown!

But you should always be working toward a goal of saving more. Up the amount you are automatically moving into savings whenever you can.

Most college students don’t have a lot of money, so you may wind up saving a little less than 20% some months or dipping into that account to pay an unexpected bill. But by having that money set aside, “it’s protecting you from having to dip into credit cards for those unexpected expenses,” Francis said.

Sun prefers more of a 50-25-25 rule — 50% for basic living expenses, 25% for fun stuff and 25% for savings.

“I think savings should be as much of a priority as wants,” Sun said. “Let’s face it, if the pandemic has taught us anything, it’s good to be prepared.”

And, she said she thinks it’s easier to think in quarters.

“And if it’s easier, we have a tendency to stick with it, making savings more sustainable,” Sun added. “When it comes to managing your money, the simpler you can make it, the better it’ll be for you.”

Everyone agrees you need a budget but, as you can see, even financial advisors vary in how they think it’s best to budget and manage your money. So, no one is telling you that you have to do something a certain way — figure out what works for you.

There are a variety of ways you can keep track of your budget — you can use a budgeting app, set up a spreadsheet yourself or write it in a simple note on your phone. You can even go old school and write it down in a notebook. Or, you might want to try cash-stuffing, an all-cash budgeting method that has become popular on TikTok. Essentially, you convert your paycheck into cash and have a physical set of envelopes that you “stuff” for different expenses like your phone bill, rent, groceries, spending money, etc.

Everyone processes things differently so it’s important to figure out which tools work best for you.

Apps will help you track exactly where each dollar you earn is going and help you earmark different savings goals — like a vacation — and how much you’ll need to save each month to reach your goal. The nice thing is that they do the calculations for you. So, you plug in the numbers and then it’s a minimal lift on your part. Some will even let you track other accounts, like your 401(k) when you get that first job, or sync up with your partner’s accounts to track your household finances.

A few of the budgeting apps Francis recommends are Monarch Money, Mint.com and YNAB (You Need a Budget).

Sun says it’s OK if you prefer to track your expenses in a Google spreadsheet. Her team has also created a simple college budget worksheet you can download — MyBudgetWorksheet.com. Or, if that’s not your style to have to track every detail yourself, use your debit or credit cards to track your expenses and set up an alert to let you know when an expense goes through.

The bottom line: You have to be tracking what money is coming in — and where you’re spending it.

Once you figure out your method for tracking your budget, it’s important to schedule regular check-ins with yourself to make sure your spending is in check and you’re not spending more than you’re making — or that you’re not saving any for emergencies.

Maybe that’s once a week or once a month. Again, you have to find what works for you. If you struggle with keeping your spending in check, maybe make it weekly (at least at first) to really put those numbers in front of you and make any adjustments you have to before it gets out of hand.

Francis likens money check-ins to stepping on the scale when you’re on a diet. “I have a love-hate relationship with my scale, but what I will tell you about the scale is that it doesn’t lie,” she said. “It tells me exactly where I’m at so I can make better decisions.”

At the end of the day, it’s about making sure you are on track.

Sun recommends taking a look at what you have left in your savings and reviewing your expenses during these money check-ins. Then ask yourself:

1. Are you surprised by how much money you have left?
2. Do you have any spending regrets?
3. Would you like to set a new spending, savings or earning goal for next month?

“Commit to spending less and saving more,” Sun said. “Shop online and do curbside or in-store pickup rather than going into stores, as this can prevent impulse shopping that can really wreak havoc on a limited budget. Get in and get out, and save more of your money.”

And, if you do overspend — don’t beat yourself up.

“No one is perfect!” Francis said. Instead, “look to the next month to see if there are some areas you might be able to cut down a little bit.”

The value of that weekly or monthly check-in with yourself is to get real about what you’re spending.

“Our brains are not powerful enough to keep track of every dollar we spend,” Francis said. “They’re just not.

“It’s not until you see the numbers tallied that you actually realize what you’ve spent,” she added. “The vast majority of us underestimate what we spend and we forget those one-offs.”

During these check-ins is also a good time to see if you are able to increase the amount you are putting into savings. Make that a regular part of your check-in — can I go from saving $20 a month to $25? And, if you take on any side hustles or odd jobs like babysitting or walking someone’s dog, try not to blow all of that money. Put some — or all — of it into savings. It was money you weren’t expecting anyway, right? Why not squirrel it away and let it grow? Then, maybe one day, the thing you were going to buy with it, you can buy with the interest you made on that money. And you still have the initial amount for something else!

It’s really all how you frame it. You can look at money as boring and something that “isn’t your thing.” Or, you can look at it as a way to have money for all the fun stuff you want now — and in the future.

I mean, why didn’t anyone tell me money could be fun?!

It’s easy to get caught up in the peer pressure — if your friends are going out and spending a lot of money, you want to go, too. You have to remember that they may have a bigger budget than you do. Or, they are blowing their budget and either don’t know or don’t care. Never make assumptions about people and their money. And don’t concern yourself with their money! That’s wasted energy. It would be so easy to complain about how other people have more money than you — or, you could get in there and start figuring out how to make — and save — money yourself.

You have to make your own decisions. So, let’s say you can’t afford to go out. That doesn’t mean you have to sit home and feel sorry for yourself that you’re poor. Do something else (that doesn’t break the budget). You don’t have to be rich to have fun!

One way to make it a little easier, Sun suggests, is to try the buddy system — just like you might do when you’re dieting or exercising. Get a friend who agrees to track their money along with you and you can compare notes. You can cheer each other on when you’re crushing it, have a sympathetic ear to turn to when you’ve overspent or got stuck with an emergency expense, and just generally discuss your questions about money, seek out the answers — and share what you’ve learned.

And, you don’t have to make it a boring business meeting. This is your meeting — you set the rules! So, maybe you discuss money over ice cream or plan to watch a movie afterward. Make it something you’re looking forward to. And, if you find you’re both crushing it, why not celebrate by treating yourself to something fun?

“With the confidence to discuss it, you’ll have people to go to with your money questions, and you’ll start to see money as a ‘tool’ rather than a social or status identity. This will help you identify ‘needs’ versus ‘wants’ and make decisions that benefit you and your finances,” Sun said. “For example, if you’re invited to a dinner, concert, event, or shopping trip that you really shouldn’t splurge on, you want to be comfortable enough to speak up and advocate for your financial priorities.”

We’ve all been there, where we can’t afford something that we want. That’s a bummer. But it’s even worse when you can’t afford something you need.

“Saving money and having personal wealth isn’t just nice to have; it’s essential. You need to be able to afford the things you need in life, and money, as a tool, can help you buy a car to get to a better job, move you into a more practical or safer neighborhood, pay for more education, and more,” Sun said. “Getting into that money-saving mindset takes practice. The earlier you start saving and investing, the harder your money can work for you.”

That is perhaps one of the most important money lessons of all for college students and new grads: The decisions you make about money now will set the foundation — the building blocks — for everything else you want to do in your life. You might say — Oh, I’ll worry about that later when I’m older. If you get yourself into debt now, “older” you will actually have a lot more to worry about. Let’s say older you wants to buy an apartment, get married, have kids or go on a vacation. They may not be able to — or they might have to delay those things — if you’ve saddled them with debt. On the flip side, if you are smart with money now, you will build a strong foundation so that you can do the fun things you want now and older you can do any of those things whenever they’re ready. No regrets.

See why we keep telling you that you need a budget now? It’s because we want you — and older you — to have the life you want.

Darreonna Davis, a student at Howard University who wrote about budgeting while you’re in college for CNBC’s “College Voices” series, said that before writing the story, she didn’t have a budget because she wasn’t sure where to start — or if she even needed to because she didn’t have a lot of money.

I’ll bet a lot of college students can relate to that! I know that is exactly how I felt when I was in college and even into my 20s.

“I learned that budgeting is essential to saving and, eventually, building your money. I learned that all the things it takes to start a budget are already at my fingertips, and it isn’t as hard as I thought!,” Davis wrote. “Believing that just because my income was limited and I had few expenses was a mistake on my part in my financial journey. Now, while in college, is the best time to begin practicing money management.”

Yes, Darreonna! So well said. And, by starting while you’re in college, it gives you a strong foundation to build on so that your money — and what you can afford to do today, tomorrow, next week or five years from now, keeps growing.

Subscribe to CNBC on YouTube.