Effective money management is an important part of a typical graduate student’s life. That’s because graduate students often have little income, little spare time and tend to work with longer planning horizons than most people. A planning horizon is the time period over which one implements a financial plan. For a graduate student living on a periodic grant, the planning horizon typically spans the time period from the present until the date of the next grant cheque.
But there are two things that conspire against a successful outcome. First, human beings aren’t very good intuitive estimators. Second, small budgeting errors over the short term can accumulate into big ones over the long term. If you need proof that these phenomena prevail in the real world, count how many students you know who at one time or another (usually in April) ran out of cash before they ran out of planning horizon.
Knowing the root causes of budgeting failure is handy, because it leads directly to a four-part solution.
For two or three weeks write down where every dollar goes (even coffee, video rentals and the Laundromat). This will determine your cash outflows. Most people make wildly incorrect estimates of the outflow that occurs on a day-to-day basis. Writing down what you spend will lead to a much better estimate.
With your observations of weekly outflows in hand, you can then estimate what you are going to spend from now until the arrival of the next grant cheque. You can similarly estimate cash inflows from earnings over the same period.
Finding out whether you can cover expenses over your planning horizon is simple. The calculation is as follows:
Surplus (Deficit) = (cash on hand + expected income) – (monthly outgoings x months left in the planning horizon)
If the value is positive, you are fine. If not, you need to find income or cut back on your spending.
You need to perform and re-perform the above calculation relatively frequently. Monthly is probably not frequently enough. Every one to two weeks is somewhere around just right. That is how you check that the estimate you originally came up with bears a resemblance to your current spending reality. Every couple of months, go back to recording outflows for a week or two and check your estimate. If you find your surplus is shrinking, or worse, going into deficit territory, you need to increase the frequency with which you check outflows and do the Surplus/Deficit calculation again.
Another aspect of effective money management is getting value for your money. There are many things one can do to improve in this area.
A few suggestions
A good first step is to invest in term deposits. These are deposits that have a fixed future maturity date and an interest rate that is usually higher than what banks pay on account deposits. Some are cashable – a feature that allows the owner to withdraw cash before the maturity date if funds are needed. Your financial adviser can explain which is best for you and work with you to determine maturity dates that best fit your expenditure plan.
You might also want to find a bank that offers a no-fee chequing account and Internet access to your account – like PC Banking at Loblaws. The next best thing is a low-fee account that has cash machines near where you work (e.g. campus) or live.
Never use a bank machine from a bank other than your own. The cash withdrawal fee can be as much as $3. Finally, check the sale flyer at your grocery store. Acquiring a small inventory of soup and other things purchased at $0.69 rather than at full price adds up to a nice saving over time.
The more important point is that if you put a bit of thought into how and when you spend your money, you will probably come up with lots of good savings ideas on your own.