Chapter 4. How do you assess your spending habits?
In Chapter 1, we learned about the importance of budgeting, which is to create a spending plan based on your expected income and expenses. When creating this financial plan, it is crucial to separate your needs and wants. This process will help you control impulse spending and stick to your budget.
Needs are what are required to survive, such as food, clothing, and housing. Wants are things that are not necessary but what you wish to have for your comfort and satisfaction in life. Often, wants look like needs because there is no clear line between the two. For instance, food and clothing can become wants when you desire to have an extra amount of them. Keep in mind that everyone has different wants and needs according to their own life situations and goals.
How to
How can you determine needs vs. wants? Using the budgeting template Links to an external site., identify your fundamental financial needs, which are often recurring expenses, such as rent, utility, transportation, insurance, and meals. In addition, write down all your wants. Doing so can help you determine optional expenses you can think again before spending money, such as coffeeshop drinks and video streaming services. Understanding your wants and needs is an important step for managing your short- and long-term financial goals. However, do not be too hard on yourself in limiting wants. Although they may not be essential for surviving, if purchased with a plan, they can bring joy to your life.
In addition, by assessing your spending habits, make sure to protect your credit score. Building and maintaining a good credit score is one of the important financial skills you are encouraged to develop while in school. A good credit score is important because, by demonstrating that you pay back borrowed money on time, you will find higher chances of borrowing money with favorable interest rates in the future. This is helpful when you prepare for big purchases, such as car loans and mortgages. Thus, establishing a good credit score during school years can help you manage your finances after graduation. As a student, meeting on-time bill payment helps you build a good credit history.
To achieve a good credit score, it is important to maintain a low credit utilization rate — the ratio of your outstanding credit card balances to your credit card limits. In short, it measures the amount of available credit you use. In theory, the best credit utilization is 0, which means you do not use any of your credit limits. In reality, the good credit utilization ratio is less than 30 percent of your available credit. For instance, on a credit card with a $2,000 limit, keep your balance below $600. Be aware that your credit score may drop if your credit card balances exceed that threshold.
If you own several credit cards, we advise you to calculate your credit utilization rate as below. First, gather your credit card information. Add all the balances and then add all the limits. Next, divide your total balance ($4,000) by your total credit limit ($21,000). Then, multiply by 100 to get the utilization rate. The below example yielded the credit utilization rate of 19 percent, which meets the ideal percentage of below 30 percent.
| Credit Card | Balance | Limit |
| A | $300 | $1,000 |
| B | $700 | $5,000 |
| C | $3,000 | $15,000 |
| Total | $4,000 | $21,000 |
If you want to learn the related topics in detail, please visit our modules on Credit Cards and FICO Credit Score.
Practice
Now that you know how to monitor your spending and credit score, think of paying it forward, and discuss ways to track your spending and build better spending habits with your family and friends.
Congratulations! You can move on to Chapter 5. How do you protect your financial well-being?
To review the full module on 10 Principles of Personal Financial Literacy, click here.
This was made possible in partnership with The Singleton Foundation for Financial Literacy and Entrepreneurship. This video and more videos like this can be found on Millionstories.com.