Unit 6.3 Part 1 Budget
Categories
What is a Budget?
• A plan for spending and saving money
• Most people think
budgets are:– Rigid and inflexible
– Painful – who wants to
eat Top Ramen every
night!
– No fun!
A budget takes the fun out of money – Mason Cooley
Why Budgets Make Sense
• Budgets help you:– Set priorities
– Achieve what’s
important to you
• A good budget is:– Realistic– Ongoing– Clear and easy to
use
Budget Categories
• Income– Gross– Net
• Savings– Emergencies– Long-Term– Retirement– Short-Term
• Expenses– Fixed– Variable– Discretionary
Income: Money Earned
• Gross income: An individual’s income before taxes.
• Net income: Income after taxes are paid.
• Taxes can range from 15% to 31%.
It is important that you use your NET INCOME when creating your budget!
Taxes and Deductions
• First job pays $30,000/year. • Your salary is your gross income. Take off at least 25% for taxes
and other deductions. That’s what’s left for you to spend.• Example:
Gross salary = $30,000Minus 25% taxes and deductions - 7,500Net income $22,500
Total Your Monthly Earnings
• Bonus pay• Dividends and interest• Commissions• Alimony and/or child support• Public assistance• Pension or retirement income
List your salary or self-employment wages as well as any other income you receive, such as:
Savings: Pay Yourself First
• Savings: unspent income• Types
– Emergencies: Plan to set aside Three – Six months’ living expenses
– Long-term: Large ticket items (house, car, college)
– Retirement: It’s never to early to start
– Short-term: Vacation, clothes, new skis
Personal Savings Rate Declining
• 1974 to 1984– 10%
• 1985-1994– Fell to 4.8%
• 2004– 1.8%
• 2005– -0.5%
• 2006– -0.7%
• Hasn’t been negative since the Great Depression
Start Saving Young!
• Save $2,000 per year from age 19 – 26– $1,035,148 by age 65
• Save $2,000 per year from age 27 – 65– $805,185 by age 65
• Time value of money– Invest fewer dollars at
a younger age but have 25% more
Expenses
• Expense: A cost to meet a need or pay a debt
• Types of expenses– Fixed– Variable– Discretionary
Fixed Expenses
A cost that occurs regularly and doesn’t vary in amount
– Rent– Mortgage– Car payment– Insurance premium– School loans– Others?
Variable Expenses
A cost that occurs regularly but may vary in amount:
– Electricity– Water and Garbage– Telephone– Gasoline– Groceries– Others?
Discretionary Expenses
A cost determined by personal wants that may be controlled
– Movies, videos, CDs– Sports– Eating out– Grooming and clothes– Concerts and plays– Vacations– Others?
Budget Summary
• Establish a budget:– Income
– Savings
– Expenses• Fixed
• Variable
• Discretionary
• End up with a budget
surplus and you’re a
success!
Preparing a Budget
Budgeting is about:
• Choosing how to use your money
• Knowing what your income and expenses are every month
Four Steps to Preparing a Budget
1. Keep track of your daily spending
2. Determine what your monthly income and expenses are the month before they are due
3. Decrease spending
4. Increase income
Step 1: Keep Track of Daily Spending
Many people spend all their money—Do you know where your money goes each month?
• Have you ever had any money and then spent it?
• Do you remember exactly what you bought?
Control Your Money!• Know where your money goes• Keep a personal spending diary
Set Your Goals
Consider them when planning a budget:
• Be realistic
• Be specific
• Have a time frame
• Say what you want to do
• Have milestones
Daily Spending Diary
Watch Spending Closely
• Use a daily spending diary or log
• Know where your money goes
• Cut expenses to save for goals
Step 2: Income
Income comes in the form of:
• Allowances• Wages from a job• Miscellaneous work (like cutting
grass)• Interest and dividends from
investments
Expenses: items you pay for each month
• Housing and car payments
• Insurance• Food and clothing• Utility bills• Personal, child or
pet care
Step 2: Expenses
• Eating out or other entertainment
• Educational costs
Expenses
Expenses: Everything you pay for in a time period
There are three types of expenses:
–Fixed –Variable–Discretionary
Fixed Expenses do not change• Car payment• Rent
Variable Expenses might change• Electricity• Food
Discretionary Expenses (can be considered variable expenses)• Clothing or entertainment
Periodic Expenses (fixed or variable) occur regularly, not frequently• Insurance• Subscriptions
Expenses (continued)
• Warranties/ Service Agreements• License renewals
• Carrying little cash and controlling your credit card use
• Not shopping “for fun”
• Remembering your savings goals
• Buying only what you need
• Paying your bills on time to avoid extra fees and charges
You can decrease spending by:
Step 4: Find Ways to Increase Income
• Get a second job or a job that pays more to increase income
• Use certain tax credits that can help you increase your income (or pay fewer taxes so that you get more in your paycheck)
You can increase income by:
Budgeting ToolsThese help you manage your budget:
• Monthly payment schedule (Envelope Method)
• Monthly payment calendar
• Computer system (Mint.com)
Envelope Method• Easiest but least safe method of
budgeting method• You divide each of your
paychecks up into separate expense labeled envelopes
• When a bill is due, simply take money from envelope and apply towards the bill
Monthly Payment Calendar
Month________________________________
Sunday Monday Tuesday Wednesday
Thursday Friday Saturday
1 2$400 paycheck$25 savings$150 car$25personal$30 insurance
3$16600 transportation
4 5$25 interest (income)
6$30 cell phone
7
8 9 10 11 12 13 14
15 16$40 phone bill
17 18 19 20$10 credit card/ loan
21
22 23 24 25 26 27 28$40 entertain-
ment
29 30
Computerized Budgeting System
• Budget is set up and maintained on a computer.– Through your financial institution– Personally setting up a budget using any
computer application your comfortable with– Independent websites:
• Mint.com
Help! I Can’t Pay My Bills!
Scenario: You add up your bills and the total is $900, but your income is
only $600….
What do you do?
Think about the bills that would
be the most important!