Chapter 2

REVIEW OF RELATED LITERATURE

Students need to budget their allowances in order to put

their financial responsibility stable. The more knowledge

students have about their financial responsibility and status,

the less likely they are to be in debt (Norvilitis, et. 2006).

Budgeting allows creating a spending plan for the money. It

ensures to have enough money for the things that are needed and

necessary for the students. Blumentritt (2006) defines budgeting

as the process of allocating an organization's financial

resources to its units, activities and investments and Horngren

et al. (2004) sees budget as the quantitative expression of a

proposed plan of action by management for a specified period and

an aid to coordinating what needs to be done to implement the

plan. Thus, budgeting is a financial or quantitative statement,

containing the plans and goals to be followed in a specific

period of time.

On the other hand, Micomonaco (2003) finds college students

tend not to have a budget or calculate credit card bills based

on their actual spending. Many groups of students accumulate and

perceive debt differently because their budgeting habits are

caused by letting themselves spend their money without

considering that their allowances may shorten. Moreover, only

36% of students with credit cards reported paying off their

credit cards bills monthly (Norvilitis et al. 2006).

In addition, Piaget suggests that cognitive development

from infant to young adult occurs in four universal and

consecutive stages: sensorimotor, preoperational, concrete

operations, and formal operations (Woolfolk, 2004). The way

individuals grow can affect their thinking ability on budgeting

their money, when they mature, their cognitive ability will

enhance. Piaget proposed that children progress through the

stages of cognitive development through maturation, discovery

methods, and some social transmissions through assimilation and

accommodation (Woolfolk, A., 2004). Moreover, cognitive

development can be explained in terms of acquisition,

construction and problem-solving and decision-making that occurs

from childhood to adulthood (Smith et al. 2003).

People in this stage also imagine the best possible

solutions or principles, often through the ability to think

ideally (Woolfolk, A., 2004). In addition, Titus et al. (1989)

reported that 70% of their respondents estimated household

income and expenses but only 19% had written financial plans.

This explains that because of the different thinking ability of

every individual, it is also have different ideas that affect

their budgeting strategies towards their money. In addition, the

amount of financial information a student has usually applied

impacts their ideas and choices regarding finances (Chen &

Volpe, 1998).

Moreover, Jacqueline Curtis (2017) states that college

students roll their eyes at the idea of making a budget, which

knowing how to manage money is vital to the college experience.

College is an expensive experience that becomes pricier with

poor spending practices. Kendrick (1999) stated that only 44% of

students understand the term `budget'; in fact, only 18% of the

general population possesses a basic appreciation of simple

money management practices (Elliot, 1997).

Also according to Lainie Petersen (2016) if an individual

don’t know where their money is going, they have a hard time

managing it. In “Borrowing Against the Future: Practices,

attitudes and knowledge of financial management among college

students,” Micomonaco (2003) finds college students tend not to

have a budget or calculate credit card bills based on their

actual spending. For example, there was a significant amount of

students that did not know their SES or how much they would owe

in student loans when they graduate (Micomovnaco 2003).

Although, some college students are concerned about their future

financial status; 67% of freshmen at four-year colleges or

universities have concerns about paying their tuition. Mostly

college students have a credit card that is used in spending

their expenses. This is the highest amount of concern expressed

in over a decade (Gordon 2010).

Brian Martucci (2015) argued that most college students

have limited experience with credit cards and other forms of

credit and their credit histories are often thin or nonexistent.

However, Hitha Prabhakar (2013) stated that in 2012, 70 percent

of undergraduate students had at least one credit card,

according to the International Journal of Business and Social

Science. College is a great time to start building credit which

is crucial for leasing an apartment, purchasing a vehicle and

even landing a job post-graduation, but it's easy for many to

amass a large amount of debt while in school. In addition, a

student can use a debit card while in college. While it sounds

foolproof, student’s bank doesn’t allow a large overdraft. In

fact, turning off the overdraft protection of the student can

only spend what he or she has in the bank and won’t get slammed

with overdraft fees (Curtis 2013). Therefore, the single most

important reason for students to apply for debit cards is

to build a positive debit history and to keep records of what an

individual spend and where they spend it in their allowances is

a budgeting strategy that can be used and also one way of modern

technique in spending money.

Furthermore, Tolar (2017) stated that a zero-based budget

is also a method to consider when other budgeting methods do not

work for some individuals. It is also a strategy that is easier

and less risky process. Zero-based budgeting can drive

significant and sustainable savings, but it is more than simply

building budget from zero (Mckinsey 2017). This allows those

savings that will drive in future growth. In addition, Amatra

(2014) states that zero based budgeting was originally developed

by A. Phyyr at texas instruments and define as ‘an operating,

planning, and budgeting process’ which require individuals to

justify why should spend any money at all. Likewise, zero based

is the idea of building a budget from ‘scratch’. It is also

means that programs that would be carried out if less financial

resources were available but identified (Pine, 1976).

Additionally, the envelope system is also a technique that

can help budgeting novices and over spenders take control of

their finances. All it takes is money, envelopes and a little

bit of planning (Schwann, 2017). According to Nielsen (2016),

the principles of envelope budgeting encompass a system that

works whether the money is placed in a tin can, envelope or

tracked on the phone. Also, Ramsey (2017) states that in

envelope budgeting makes the system effective and efficient

whether putting cash in envelopes and categorize where the money

will be allotted and what will be purchases. The label in every

envelope can help every individual prioritize what is important

savings, debt reduction, periodic expenses and to distinguish

expenses. Traditionally, people have used the envelope system on

a monthly basis, using actual cash and envelopes. According to

Moreno (2017) the envelope system is so effective. It shows

right how much money is going into specific categories. Schwann

(2017) states with the cash-based envelope system, can avoid

the overdraft fees and debt associated with careless debit and

credit card swiping. Cash-only users can’t spend more than

they’ve allotted and are more likely to feel an emotional

connection to their money.

Moreover, according to Hamm (2016) proportional budgeting

is also one of the strategies in budgeting money. This is a very

clever simple budgeting technique, first introduced widely in

the excellent personal finance book All Your Worth, written by

Elizabeth Warren and Amelia Warren Tyagi (2005). Proportional

budgeting means simply divide the stipends into three piles

based on percentage. Hamm (2016) states that the idea behind of

this kind of budgeting is to split all the spending into three

categories which is the needs, savings, and wants. The beauty

of this approach is you can set the percentages based on your

needs and priorities (Peterson, 2014). It helps people realize

how large of allotted allowance in filling their personal wants,

needs and also to save money. In addition, Hamms (2016) give an

example of splitting the stipends. It can be 50% of the money is

on needs, 30% on wants, and 20% on savings that can describe as

a 50/30/20 budget. On the other hand, it can well off and spend

only 20% on need, 50% on wants, and 30% on savings–a 20/50/30

budget. On the other hand, Peterson (2014) states that it can be

70/10/20 if the income is limited or the basic expenses are high

and if preparing for an emergencies and retirements the

financial goals is 40/10/50. This strategy depends in every

individual on how they put a percentage and set up a great

opportunity to reflect.

According to Merchant and Van der Stede (2003) budgets have

played a key role in managing an institution, both private and

public. It is an important control system in many companies, and

thus, in budgeting money as well. Although, saving is one of

the aspects in managing money, Perry and Morris (2005) stated

that it is important given the volatility of the modern economic

climate and related factors that are often beyond an

individual's control. The process is reversed and it is in the

process of preparing its goals to determine the overall

objective of the budget. It is to keep control of the activity

done in the company by providing a road map for future

activities and to set a series of goals to be achieved and the

means by which to achieve those goals (Achim, 2009). The

importance of budgeting is to track previous and upcoming

expenses of every individual and make control of their money.

Indeed, Budgeting is the realistic goals in which allotted

money is recorded to spend money wisely. It is also a tool to

monitor individual spending plan throughout a specific time.