8.2 | Lecture: Personal Finance

Table of Contents

Why It Matters
Taking Control of Your Finances
Spending
Budget

1. Why It Matters: Financial Management

College life comes with a lot of expenses. Students must balance the cost of courses, supplies, and books—as well as the costs of living like rent, food, clothing, transportation, and medical care. And we haven’t even brought up leisure activities yet, which can soak up the money really quickly. Watch this interview with two college students and a financial adviser. Do their situations seem familiar? Are you facing any of the same issues?

The students in the video above struggled to keep track of their money and to keep their spending in check. One of the first—and easiest—steps in financial management is to simply pay attention to your money: record (or look back to see) where and how you’re spending it. Once you know where your money is currently going, you can figure out what steps to take next.

In this section, we’ll learn how to balance these costs and spend your money well.

2. Taking Control of Your Personal Finances

Taking control of your personal finances begins with thinking about your goals and deciding what really matters to you. Here are some things to think about:

Is it important for you to graduate from college without debt? Is it acceptable to you, or necessary, to take some student loans?
What are your priorities for summers and other “free time”? Working to earn money? Taking non-paying internships or volunteering to gain experience in your field? Enjoying social activities and time with friends?
How important is it to take a full load of classes so that your college education does not take longer than necessary?
How important is it to you to live in a nice place, or drive a nice car, or wear nice clothes, or eat in nice restaurants? How important in comparison to your educational goals?

There are no easy answers to such questions. Most people would like enough money to have and do what they want, low enough expenses that they don’t have to work too much to stay on budget, and enough financial freedom to choose activities without being swayed by financial concerns. Few college students live in that world, however. Since you will have to make choices, it’s important first to think about what really matters to you—and what you’re willing to sacrifice for a while in order to reach your goals.

Make More or Spend Less?

That often becomes an issue for college students. You begin by setting up a realistic budget and sticking to it. A budget is simply the best way to balance the money that comes in with the money that goes out.

For most college students, the only way to increase the “money coming in” side of the budget is to work. Even with financial support from your family, financial aid from the college, your savings from past jobs, and the like, you will still need to work if all your resources do not equal the “money going out” side of the budget. The major theme of this lecture is avoiding debt except when absolutely necessary to finance your education. Why is that so important? Simply because money problems and debt cause more people to drop out of college than any other single factor.

This lecture includes a discussion of how students can earn money while in college and the benefits of working. But working too much can have a negative impact by taking up time you might need for studying. It’s crucial, therefore, whenever you think about your own financial situation and the need to work, to also think about how much you need to work—and consider whether you would be happier spending less if that meant you could work less and enjoy your college life and studies more. As we’ll see later, students often spend more than they actually need to and are often happier once they learn to spend less.

How would you complete each sentence? [Click each to find the answer.]

3. Spending on Essentials, Spending on Optionals

More people get into financial trouble because they’re spending too much than because they’re making (or receiving) too little. While spending may seem a simple matter—“I need to buy this, I’d like to buy that”—it’s actually very complex. America is a consumer society, and we’re deluged by advertisements promising that we’ll be happier, more successful, better liked by more people, sexier, and everything else if only we buy this. Companies have spent billions of dollars researching how to manipulate our buying behavior. No wonder it’s so tough to resist these pressures!

Why does a person feel compelled to buy fast food for lunch, or a new CD with a song they just heard on the radio, or a new video game a friend says is so good, or a new article of clothing? We owe it to ourselves to try to understand our own attitudes about money and spending. Here’s a good place to start:

Having money or not having money doesn’t define who you are. Your real friends will think no less of you if you make your own lunch and eat it between classes or take the bus to campus rather than drive a new car. You are valued more by others for who you are as a person, not for what things you have.
You don’t have to spend as much as your friends to be one of the group. Some people always have more money than others and spend more. Resist any feeling that your friends who are big spenders are the norm. Don’t feel you have to go along with whatever expensive activities they propose just so you fit in.
A positive attitude leads to success. Learn to relax and not get stressed out about money. If you need to make changes in how you spend money, view this as an exciting accomplishment, not a depressing fact. Feel good about staying on a budget and being smart about how you spend your money.
Be realistic about what you can accomplish. Most students have financial problems, and they don’t just go away by waving a magic wand of good intentions. If your budget reveals you don’t have enough money even while working and carefully controlling your spending, you may still need a student loan or larger changes in your lifestyle to get by. That’s OK—there are ways to deal with that. But if you unrealistically set your sights so high about spending less and saving a lot, you may become depressed or discouraged if you don’t meet your goals.

Before you can make an effective budget, you need to look at what you’re spending money on now and consider what’s essential and what’s optional. Essential costs are the big things:

Room and board or rent/mortgage, utilities, and groceries
College tuition, fees, textbooks, supplies
Transportation
Insurance (health insurance, car insurance, etc.)
Dependent care if needed
Essential personal items (some clothing, hygiene items, etc.)

These things are sometimes called fixed costs, but that term can be misleading. If you have the option to move to a less expensive apartment that is smaller or a few blocks farther away, you can partly control that cost, so it’s not really “fixed.” Still, for most people, the real savings come from spending less on optional things.

Look back at the amounts you wrote in the earlier exercise “Where Does the Money Go?” These things are “optional” expenses—you can spend more or less on them as you choose. Most people spend by habit, not really thinking about where their money goes or how quickly their spending adds up. If you knew you were spending more than a thousand dollars a year on coffee you buy every day between classes, would that make you think twice? Or another thousand on fast food lunches rather than taking a couple of minutes in the morning to make your lunch? When people actually start paying attention to where their money goes, most are shocked to see how the totals grow. If you can save a few thousand dollars a year by cutting back on just the little things, how far would that go to making you feel much better about your finances?

The following are some general principles for learning to spend less. The “Tips for Success” then lists specific ways you can try to follow these principles in your daily life. Remember, spending money doesn’t define who you are!

Be aware of what you’re spending. Carry a small notebook and write down everything—everything—you spend for a month. You’ll see your habits and be able to make a better budget to take control.
Look for alternatives. If you buy a lot of bottled water, for example, you may feel healthier than people who drink soft drinks or coffee, but you may be spending hundreds of dollars a year on something that is virtually free! Carry your own refillable water bottle and save the money.
Plan ahead to avoid impulse spending. If you have a healthy snack in your backpack, it’s much easier to not put a dollar in a vending machine when you’re hungry on the way to class. Make a list before going grocery shopping and stick to it. Shopping without a list usually results in buying all sorts of unneeded (and expensive) things that catch your eye in the store.
Be smart. Shop around, compare prices, and buy in bulk. Stopping to think a minute before spending is often all it takes.

4. Managing a Budget

Budgeting involves analyzing your income and expenses so you can see where your money is going and making adjustments when needed to avoid debt. At first, budgeting can seem complex or time-consuming, but once you’ve gone through the basics, you’ll find it easy and a very valuable tool for controlling your personal finances.

Why create and manage a budget? Going to college changes your financial situation. There are many new expenses, and you likely don’t know yet how your spending needs and habits will work out over the long term. Without a budget, it’s just human nature to spend more than you have coming in, as evidenced by the fact that most Americans today are in debt. Debt is a major reason many students drop out of college. So it’s worth it to go to the trouble to create and manage a budget.

Managing a budget involves three steps:

Listing all your sources of income on a monthly basis.
Calculating all your expenditures on a monthly basis.
Making adjustments in your budget (and lifestyle if needed) to ensure the money isn’t going out faster than it’s coming in.

What If Your Budget Doesn’t Work?

Your budget may be unbalanced by a small amount that you can correct by reducing spending, or it may have a serious imbalance. If your best efforts fail to cut your expenditures to match your income, you may have a more serious problem, unless you plan in advance to manage this with student loans or other funds.

First, think about how this situation occurred. When you decided to go to college, how did you plan to finance it? Were you off in your calculations of what it would cost, or did you just hope for the best? Are you still committed to finding a way to continue in college?

If you are motivated to reach your college goal, good! Now look closely at your budget to determine what’s needed. If you can’t solve the budget shortfall by cutting back on “optional” expenses, then you need more dramatic changes.

Are you paying a high rent because your apartment is spacious or near campus?
Can you move a little farther away and get by temporarily in a smaller place, if the difference in rent makes a big difference in your overall finances?
If you’re spending a lot on your car, can you sell it and get by with public transportation for a year or two?

Play with the numbers for such items in your budget and see how you can cut expenses to stay in college without getting deep in debt. If you worry you won’t be as happy if you change your lifestyle, remember that money problems are a key source of stress for many college students and that stress affects your happiness as well as how well you do in college. It’s worth the effort to work on your budget and prevent this stress.

If all else fails, see a financial aid counselor at your college. Don’t wait until you’re in real financial trouble before talking to someone who may be able to offer help.

Final Check for Understanding

- End of Lecture -

Works Cited

“Chapter 11 Taking Control of Your Finances.” Taking Control of Your Finances, saylordotorg.github.io/text_college-success/s14-00-taking-control-of-your-finance.html.

Joy, Devin. “Personal Finance for College Students: Lesson Plans and Workbooks.” InCharge Debt Solutions, www.incharge.org/financial-literacy/resources-for-teachers/college/.

Learning, Lumen. “College Success.” Lumen, courses.lumenlearning.com/wmopen-collegesuccess/chapter/personal-finance-needs-alt-text/.