One significant aspect of successfully managing your money after leaving school is repaying your loans. In the process, you will be establishing a good credit rating, which is a key to your future financial independence.
Budgeting is the process of planning for the most effective use of your financial resources by defining your expected
monthly expenses (such as rent, groceries, telephone, and student loan payments) and the resources you expect to
have available (such as your earnings) to pay those expenses.
The enclosed worksheet will help you create a budget by itemizing your expected expenses as well as your expected
income and other resources to meet those expenses. The three main steps in creating an out-of-school budget are
:
You will want to create your budget for a fixed period of time and plan to review it regularly. In general, a one-year
budget, broken down on a month-by-month basis, will create an accurate picture of your economic situation. The
information that follows will help you complete the worksheets.
Begin by gathering your pay stubs and bank statements. Most of your income will probably come from salary. To calculate your gross monthly salary, divide your gross annual salary by 12. Remember, this result is your gross monthly salary, before deductions.
To figure out how much you will have available to pay your bills and living expenses each month, you must compute
your net monthly salary. This is the amount you have after state and federal taxes, Social Security and Medicare
(FICA taxes), and any other withholdings are deducted. Your pay stubs will give you accurate information if you
remain in your current job. Or you can estimate that 25 to 30 percent of your salary will be withheld for taxes
and FICA. So, to estimate your net monthly salary, multiply your gross monthly salary by .75 or by .70.
You then add any other income to your salary to determine your total net monthly income. Other income sources might
be a second job, help from your parents or family, interest income, or non-taxable income.
To determine your expenses, you will need your checkbook. You will also need to collect basic information, such as copies of your bills. If you will be living in the same area as you have been while you were in school, you already have much of the information you need to figure many of your living expenses. But, if you will be moving, you will need to do research to estimate your total monthly expenses. The worksheet will provide you with a good list of expenses to plan for and to find out about. When you look for a place to live, ask the manager of the property to provide you with information about utilities and other costs typically incurred by people living there.
As you calculate your expenses for the worksheet, try to identify them as "fixed" or "variable."
Fixed expenses are those that occur routinely each month and are usually for the same amount. Examples of fixed
items are your rent, car payment, and consumer debt payments. Fixed expenses are unlikely to change. You can control
variable expenses such as utility bills, groceries, and entertainment. thinking about your expenses in this way
will help you identify the expenses you can change if you want to or need to.
Remember that not all your expenses-fixed or variable-will occur every month. For example, car insurance premiums
are often paid only twice a year. But if you take the annual amount and divide it by 12 months, you can account
for the expense in your budget as a "savings" item each month so you will be prepared to pay the bill
when it arrives
When using the enclosed worksheet, remember that the expenses and resources you are comparing should be for the
same period of time.
Housing:
If you lived on campus or with your parents while you were in school, and if you plan to live on your own or with roommates after graduation, you can estimate the cost of housing in the area where you plan to live by calling various rental properties, adding up the prices, and computing an average. You can also review listings in the local newspaper. You should expect to spend 20 to 30 percent of your monthly net income on housing.
Utilities:
You will also need to budget for utilities, such as gas and electricity, if they are not already included in your rent. As already suggested, the managers of properties you are interested in should be able to tell you the costs of these items, and the local utility companies might also be willing to give you specific information about specific properties. Do not forget the costs of a telephone. If you will not be living near your family, long-distance telephone calls may be a significant budget item. Budget 2 to 10 percent of your net income for utilities.
Transportation:
This includes routine travel, such as commuting to work, but you may also need to budget for pleasure or other long- distance travel. Transportation could include bus or train fare, or maintenance on your car and the costs of gas. Multiply the number of miles you expect to drive each month by 30 cents. for a reasonable estimate of the monthly costs of gas and maintenance. You may also need to allow for parking fees. In general, you can expect to spend 2 to 5 percent of your net income on transportation.
Food and Personal:
Personal items and food costs include clothing, groceries, entertainment, dining out, dry cleaning, and haircuts. If you keep a day-by-day record of your expenses for a month or so, you will have a good idea of how much you spend on these items. You can estimate that you will spend 10 to 15 percent of your net income for food and 2 to 10 percent for personal expenses, for a total of 12 to 25 percent of your net income.
Debt Obligations:
To avoid excessive debt expenses, you should try not to spend more than 5 to 15 percent of your net income for monthly payments on student loans and consumer debts, including credit cards and car payments. If you are using more than 15 percent of your monthly net income for these payments, you may need to make some budget adjustments
Insurance:
Your health, life, auto, and renter's/home owner's insurance payments are usually fixed amounts, but they might not be paid on a monthly basis. You should budget 2 to 5 percent of your monthly net income for these expenses. Some companies that provide health and life insurance will, with your authorization, automatically deduct premiums from your paycheck or your bank account.
Health Care:
Setting aside 5 percent of your monthly net income for health-care expenses will give you a resource for costs your insurance may not pay. Even though you probably will not have health-care costs every month, you should set this money aside so that you will be prepared when these expenses arise.
Savings:
It is very important to build up your savings. Plan to put 5 to 10 percent of your net earnings into a savings account. This money can be set aside for unexpected expenses, emergencies, or vacations. Your employer may offer a pre-tax savings plan, often called a 401(k) account, a 403(b) account, or "annuity." This type of plan allows you to save for your future and reduces the amount of income tax you pay. Your employer's benefits coordinator can advise you on these pre-tax plans.
Miscellaneous:
Because you cannot anticipate every monthly expense, you should set aside 1 to 2 percent of your monthly net income for miscellaneous expenses. These could include out-of-pocket expenses, convenience items, magazines, newspapers, and other small purchases.
This amount represents the difference between your available resources and your expenses. Calculating the balance will give you a useful figure on which to base your selection of a repayment plan for your Direct loan. The balance is determined by subtracting your expenses from your net income.
If your balance is negative-in other words, if your expenses are greater than your income-you need to reduce your
expenses or increase your income. Adjusting your expenses or income will help you find a way to make sure there
is room in your budget for your student loan payment. The Direct Loan Servicing Center can help you identify the
repayment plan that will require the lowest monthly payment amount, and you can use this plan until your economic
situation improves.
Under the Direct Loan Program, you can change your repayment plan as your financial situation changes. This helps
you meet your payment obligations and allows you to reduce the total costs of your loans by making larger payments
when you can afford them.
If your total resources are greater than your total expenses-in other words, if the balance is a positive dollar
amount-you might select a loan payment option with a higher monthly payment. In this way, your loans will be paid
off sooner reducing the overall costs.