Manage Your Money with a Descriptive Budget
A descriptive budget can help student loan borrowers get control over their finances.
A descriptive budget tracks how you are spending your money. This is in contrast with a traditional prescriptive budget, which sets limits on how you may spend your money. Increasing your awareness of how you spend your money is the first step in exercising financial restraint.
Start by tracking your spending for a month. Get receipts for every expense. If no receipt is available (e.g., for purchases from a vending machine), write down the date, amount and description in a notebook.
Each night, transcribe the receipts into a spreadsheet or a program like Quicken or Mint.com. Assign each expense to a category like food, clothing, housing, utilities, medical care, education, transportation, eating out, entertainment, insurance, loan payments and taxes. Also tag each expense as a need (mandatory) or a want (discretionary).
Be realistic when classifying expenses into the mandatory category. A cell phone is a luxury, not a necessity. If you need a cell phone for emergencies, all cell phones can dial 911 even if they do not have a service plan. Mandatory expenses are those where you would die or go to jail if you didn’t spend the money. Even mandatory expenses may have a discretionary element. For example, you need to eat, but that doesn’t mean eating out at five star restaurants.
At the end of the month, total the expenses for each category and tag. You may be surprised at how much you are spending in some categories, like eating out and entertainment. The next time you want to spend money in these categories, you’ll hesitate a little and maybe spend less.
You can analyze your spending patterns to evaluate how you are doing. If your total spending exceeds your monthly income, you are spending beyond your means. If your total spending equals or exceeds your monthly income, you are living paycheck to paycheck. If your total mandatory spending is less than your monthly income, you have an opportunity to fix your finances by reducing your discretionary spending. Otherwise, you are in a difficult financial situation and will have to make more drastic changes to increase income or reduce expenses.