Financial Planning 101: Budget Basics

In two weeks I'll be moving into my new apartment in NYC, and 4 weeks after that, I'll be kicking off my career in public accounting with a firm in Manhattan. After signing an agreement and writing out a check for my security deposit last week, I spent an absurd amount of time in excel building a comprehensive budget in annual, monthly, and weekly versions. Yes, this was mainly due to the fact that I am a big nerd, and found it to be really fun and somewhat therapeutic; however, creating a budget is also just a really simple and legitimate way to organize your finances, and learn to live within your means. After my experiences with my own budget, I decided to write this blog post to help you all to do the same. 

Creating a budget/plan can be really helpful for a lot of different reasons. One reason is that a budget will help you to stretch your paychecks to best meet your own personal needs. Another big reason is that a budget can help you to create savings goals (ex: money to buy a new car), as well as track your spending. This last point is a big one -- by tracking your spending over time, you will be able to notice where all of your money is actually going and make any necessary adjustment, such as cutting down on the number of grande iced caramel lattes you purchase each week. 

To help you all get started, I broke the budgeting process into 5 steps:

1. Estimate your actual income!

In order to create a budget that will be accurate and helpful, you first need to figure out about how much money you will have to spend over the given period. There are a couple of ways to do this, but the easiest would probably be to take a look at your pay stubs to figure out approximately how much money you take home each week, AFTER TAX. 

When I created my budget, I started with my annual salary. I reduced the salary by my expected 401k contributions for the year (see this post for more information about 401k and IRA plans!), and then took out a percentage from the remainder for estimated annual taxes. This left me with the estimated after tax dollars that I will have to spend on all of my other expenses for the year.

2. Fixed Expenses

The next step is to figure out all of your fixed expenses, which are those periodic expenses that do not change very much from month to month, for example: rent, student loan payments, insurance, etc. Reduce the after tax income that you figured out in the first step by all of these foreseeable and fixed expenses, You will want to be as detailed as possible, including any and all expenses you can think of, to provide a more accurate picture of your finances. 

3. Variable Expenses

This step is very similar to step 2. I broke them up to emphasize the difference between those expenses that are very predictable and regular (fixed), and those that can vary and change from period to period (variable); however, the premise is the same. You will want to include any expenses that you can think of to ensure your budget will be accurate. For your variable expenses, you will often have to do a bit of estimating; however, this is not difficult. Take a look at your payment history for things like your phone, electric, and water bills to come up with a periodic estimate based off of your past history. When in doubt, do yourself a favor and lean towards the more conservative (higher) estimates.

To emphasize my point about being as detailed as possible, I will share that in my own budget, I went so far as to do a little bit of research to estimate the costs that I will be faced with when I move to NYC. I have lines in my budget for groceries, eating out, dry cleaning, an unlimited monthly metro pass, and transportation expenses to visit my boyfriend in DC. All of these estimates were based on actual data found online (ex: the line in my budget for groceries and eating out is based on data collected for single males around my age and living in NYC).  

4. Prioritize your "wants"

 Here is where you can do a little bit of goal setting. After reducing your after tax income by all of your fixed and variable expenses, you will see how much money is left over for everything else. It is at this point in your budget that you can set some savings goals or reserve some money in your budget for some "wants" such as an iPad Air, Beats by Dre headphones, and/or a brand new 15" Macbook Pro w/Retina display (in full disclosure, all three of these items are currently reserving some space in my budget). 

With the money left over in my own budget, I put in some placeholders for my own wants and needs, but I also reserved some cash for incidentals that might crop up over the course of the year. You never know when you might need to buy an "emergency" round-trip plane ticket to Cancun!

5. Track Spending and Make Adjustments

After your budget is created, be sure to make the most of it by tracking your spending as time goes by. Identify any areas in which you are overspending, and either adjust your budget to make it more accurate, or work towards minimizing your expenses (ex: eat out less, drop the unlimited text plans, and stop paying $145/month for Equinox and join the local YMCA).

I hope that this post was helpful for you. If you're feeling a bit lost, check out this post for more information about how Mint.com can help your create a simple and interactive budget for free. As always, let me know your thoughts! Happy budgeting!

Bouncing back: the not-so-short road toward credit score repair

I could sit here and try to think of some clever and original way to put this, but I really think that the guys and gals over at myFICO.com had it right when they said that, "repairing bad credit is a bit like losing weight: It takes time and there is no quick way to fix a credit score." While this can surely be upsetting and disconcerting, it is a fact of life, and if anything, it should only serve to further emphasize the point of my last post, which was that establishing credit, and doing it responsibly, is OH SO important.

If, like many Americans across the nation, you happen to find yourself with a less-than desirable score, there are definitely some ways to (slowly but surely) rebuild your profile, and demonstrate to potential lenders that you are a creditworthy and responsible young adult. Luckily for all of you broke college students out there, you proooobably have another couple of years left living within the collegiate bubble to set some positive changes into motion before it's time to do fun big boy and girl things like, say, support yourself and like...I don't know...sign a mortgage?

Anyways, the first step to improving your credit score is, obviously, to pull a copy of your credit report and gain an understanding of the factors that have contributed to your particular score (Duh!). Due to the fact that you have already read through my last post, I am confident that the areas for improvement will be relatively apparent once you start taking a look.

Here are just a few tips that can really help to set you on the right track toward credit score repair:

• If you don't already have a credit card, get one! If you're truly broke, you shouldn't open a card with the intent of going on a really exciting and over the top shopping spree. Instead, do yourself a favor and  do something responsible like buy your groceries each week with the credit card and then pay it off in full when you get your bill using the cash you would have otherwise spent in the first place. A good rule when you're starting out is to try to never charge more than the cash you have in your bank account.

• The older a card is on your credit profile, the more of a positive impact that card can have on your score -- don't think that closing all of your old credit cards will help to improve your situation. I know from my own experience, my oldest card (and thus most valuable to my credit score), is also the card with the most egregious interest rate. I NEVER carry a balance on this card, but I keep it active by throwing small charges on every once in awhile (and then paying them off in full). This leads into the next tip...

• Unused credit cards on your profile will have a negative impact on your score: While you don't want to go and close out all of your accounts, you also don't want to have cards that are just sitting stagnant for long periods of time. If you have 2 or 3 credit cards, make sure you show them ALL a little bit of love. I have two cards with fan-freakin-tastic interest rates, so if I am going to carry a balance on any card, it will be one of those two; however, even my nastiest card deserves a charge from time to time.

• Pay your bills ON TIME!!!! This one should go without saying, but payment history can make or break you. Lenders want to see that you are capable of making regular payments on your debt, and that they will be on time. If you struggle with time commitments, do yourself the abso greatest favor and set some google calendar reminders, or sign up for auto-pay with your credit card company. So worth it!

• Finally, don't over do it: having 2-4 credit cards, each with a different type of rewards program, is pretty normal. Having 5..6...7+ credit cards is definitely not okay, and if you find yourself with that many than I would suggest seeking out a legitimate credit counselor because you may have a serious problemo on your hands. Also, you never want to be maxing out these cards. If you have a total credit limit of $5,000, this does not mean that you are in the clear to go buy $5,000 worth of nonsense. You want to keep your debt around 20-30% of your total limit (and never more than 50%).

So anyways, sorry for the lengthy post. What can I say? I just get so excited about credit scores!!!!! As always, please leave me a comment or drop me a message via the contact box in the right sidebar. Next week I'll be reviewing slash promoting a really cool online tool to help you build a budget, and keep track of your finances. 

I leave you with this:

The deets on your credit score, and why it's so important.

Okay so, before we jump into talking a little bit more about one of the easiest ways for a broke college student to survive, while simultaneously building a good credit profile, I wanted to give a little crash course on the ever-mystical Credit Score.

As I mentioned in my last post, we will all one day need to rely on our credit score for one thing or another, whether it's applying for a car loan, undergoing a credit check for a new apartment lease, or buying your first home; a good credit score can be the difference between a really manageable interest rate, and one that could really cramp the style of your chic, new, post-graduate lifestyle.

So, what is a credit score? Well, basically, it's a score derived using a formula developed by the Fair Isaac Corporation (hence the name, FICO score). The score is calculated for the three U.S. credit bureaus (Experian, Equifax, TransUnion) using information from your credit report (a summary of your credit accounts and payment history). Every person receives a credit score from each of the three credit bureaus which, due to minor differences in the credit profile information collected, can differ slightly. The scores are used by lenders as a predictor of the level of risk and creditworthiness associated with a given borrower.

Okay, well what information is used to calculate the scores? This is a more difficult question to answer. There are many factors that are taken into consideration when calculating a score, and below are the relative weights associated with each [oversimplified] description of the inputs into the equation:

• 35%: payment history -- do you pay your bills and fees on time?
• 30%: the ratio of the amount owed to creditors, and the total credit available to you. As a general rule, you want to be using about 30 percent or less of your total credit limit (and definitely no more than 50 percent). 
• 15%: the length of credit history. Borrowers who have longer credit history are considered less risky because lenders have more information about their borrowing patterns and more assurance that payments will be made on time.
• 10%: the number of accounts recently opened compared to the total number of credit accounts, and the number of recent inquiries into the borrowers credit profile (Ex: a borrower applies for a new credit card so the lender check's the individual's credit report to dictate credit limits and interest rates. Too many of these credit checks in a short period of time will have a negative impact on a score).
• 10%: the types of credit used -- revolving credit (like a credit card account) vs. a mortgage with fixed monthly payments. Each type of credit can tell lenders something different about the risk associated with a given borrower.  

Wow. Now that I am completely overwhelmed, how can I go about checking my credit report and scores? Fortunately, you are allowed one completely free credit report from EACH of the three credit bureaus every year. This means that, every four months, you can check your credit score for free! To order your report, use annualcreditreport.com which is the only authorized website under federal law. There are other services to help monitor your credit score, but they cost $$ that broke college students like us would much prefer to spend on important things like the latest iphone, new designer work out leggings, natty light, or tickets to that musical festival you have been DYING to go to.

Scores range from 300-850, and with a score of around 700+, you are in great shape. For those of us that may be suffering from a less than desirable credit score (or even worse...NO credit score!), I will detail some tips and tricks to slowly building that bad boy back up in a later post. 

I hope you all found this post to be informative and helpful! Much of the information was simplified to make it more digestible, so please please please comment, or use the contact box in the sidebar, to let me know of any questions you may have, or topics that I can clarify! 

My piggy bank is dead? What does this mean?!

As a 24 year-old recently graduated master's student,  I have experienced my fair share of financial struggles. While my years at Lehigh University have surely been some of my greatest, they have also been very, very expensive! Tuition, room & board, books, fraternity dues, clothing, beer money, spring break -- it can really add up! Thus, with the incurrence of such big expenses, and the looming threat of the "real world" as it approaches, the days of simply saving some extra cash in your room are long gone, and with that comes the death of the piggy bank.

As a student I learned, very quickly, to expand upon my already decent fiscal responsibility and begin to live on a budget. I have held at least one job since I was 16, and became more and more fiscally independent from my parents from that point on. In college I majored in accounting, and that has certainly provided an additional layer to my ability to have a really great time, while also living within my means.

I have created this blog for other broke college students, much like my former self, that are ready to begin managing their money effectively. Within it I will provide lots of personal finance tips and tricks that I have learned (often the hard way) over my past 6 years as a college student. I will discuss an array of topics such as: creating a budget, building credit (and why it's important!), managing debt, checking your credit score, leveraging rewards points, using online tools, etc.

Please feel free to post comments, or use the contact form on the right sidebar, to ask any questions or to suggest topics of interest. I hope you enjoy my blog, and I'd love to hear your feedback.

Cheers!