Budgeting Presentation for RCE Staff
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Banish the “B” Word: Developing a Spending Plan That Works Dr. Barbara O’Neill, CFP® Extension Specialist in Financial Resource Management Rutgers Cooperative Extension [email protected] Twitter: @moneytalk1
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Transcript of Budgeting Presentation for RCE Staff
Banish the “B” Word: Developing a Spending
Plan That Works Dr. Barbara O’Neill, CFP®
Extension Specialist in Financial Resource Management Rutgers Cooperative Extension
[email protected] Twitter: @moneytalk1
Many People Today are Living on Less so It’s Time to Develop a Spending Plan • Low or no increases in salary
• Higher living costs (e.g., utilities, property taxes)
• Increasing payroll deductions for health insurance premiums
• Other (e.g., day care, college tuition)
“New Normal” Analogy Trump Plaza Hotel
Penthouse (Atlantic City, NJ)
Why “Spending Plan”? • “Budget” (and “Diet”) are turn-off words
• 3 D’s: Denial, Deprivation, Don’t
• 3 C’s: Cut back, Cut out, Can’t
• The word “spending” is positive: people like to spend money
• The word “plan” emphasizes that you are in control of your money
Cash Flow Statement • Do prior to developing a spending plan
• Requires careful tracking of income and expenses
• Summary of cash receipts (income) and cash outlays (expenses) for a given period
Total cash
received during time period
- Total cash outlays during
time period
Cash surplus or deficit =
Managing Household Cash Flow
• Relationship between income and expenses – Positive cash flow (income greater than expenses)
– Negative cash flow (expenses greater than income)
• Three ways to improve cash flow – Increase household income
– Decrease household expenses
– Do both
Presenter
Presentation Notes
Cash flow, very simply, is the relationship between the total of household income and expenses: Earn more than you spend and you have positive cash flow. Spend more than you earn and you have negative cash flow. Occasional periods of negative cash flow can happen to almost anyone and are probably not a major concern. When negative cash flow becomes a way of life, however, it is very dangerous because it indicates that you are living beyond your means. In order to spend more than you earn, you are probably depleting savings and/or relying on credit to maintain your lifestyle. When one wants to lose weight, they can do three things: eat less, burn more calories through exercise, or do a little of both (better diet and exercise). When one wants to have positive cash flow, they can also do three things: increase income (or products or services in lieu of income), reduce expenses, or do a little of both (increased income and reduced expenses).
Know Your Take-Home (Net) Income
• Take-Home Pay = Net Pay = Disposable Income – Income remaining after mandatory deductions (e.g., state and
federal taxes, FICA tax) and other paycheck withdrawals
• Discretionary Income – Money left after paying household expenses
– Include savings for goals as an “expense”
• Know these numbers before committing to large expenses
Ways to Increase Income • Adjust tax withholding/tax benefits (EITC)
• Second job, overtime, sideline freelancing
• Increase/collect child support/alimony
• Charge adult children room & board
• Bartering skills and services
• Access public benefits
• Upgrade job skills
• Sell assets
• Other?
Presenter
Presentation Notes
This slide lists possible strategies to increase household income: Adjust tax withholding, using Form W-4 through your employer. Taking advantage of available tax benefits, such as deductions for tax-deferred savings plans, the child tax credit, and the earned income tax credit. Starting a home-based business or freelancing your talents and skills. Trying to increase/collect child support or alimony (caution: this may require court intervention and the expense of a lawyer). Accessing public benefits such as free rabies shots for pets and low-cost immunizations and health screening tests). Selling assets, such as a unneeded car, or having a garage sale. Upgrading job skills through additional education and training. Charging adult children “rent” and bartering (swapping) products/services.
Ways to Reduce Household Expenses • Housing
• Food
• Transportation
• Clothing
• Utilities
• Other expenses
Presenter
Presentation Notes
Note to Instructor: Review each household expense category and ask participants to share strategies that they have used to reduce expenses. Some examples are: Housing- refinancing mortgage, canceling private mortgage insurance when equity reaches 20% of home value, buying energy efficient appliances, trading down to a smaller home at retirement, etc. Food- combining coupons and store sales for double savings, buying in bulk when food is on sale or in season, buying cheaper store brands, etc. Transportation- keeping a car for as long as possible (8-10 years), buying “new used” (2-3 year old) cars, purchasing low cost airline tickets, having car routinely maintained to avoid major repair problems, etc. Clothing- shopping sales and “alternative” vendors such as thrift and consignment shops, avoiding dry clean garments, coordinating colors, etc. Utilities- using e-mail instead of the telephone, low-cost telephone calling plans, insulating the water heater, lowering the thermostat, etc.
What are Your Spending Leaks?
Step Down to Change
• Don’t cut out something completely
• Find a better alternative http://njaes.rutgers.edu/sshw/workbook/20_Step_Down_to_Change.pdf
Presenter
Presentation Notes
The Meet Yourself Halfway strategy (Strategy #10), where you reduce portion sizes and discretionary expenses by half, is one way to reduce consumption without feeling deprived of favorite foods and activities. Another way to reduce consumption (and thereby save calories and/or money) is to follow the “Step Down Principle.” Instead of eliminating a food or discretionary expense entirely, you choose a lower calorie (eating) or less expensive (spending) alternative using a staircase graphic to visualize your alternatives. A good way to visualize the Step Down strategy is to recall television ads for a product that helps people gradually quit smoking in stages by “stepping down” their nicotine consumption. Similarly, Professor Alena Johnson at Utah State University developed the concept of “stepping down” to reduce household spending. To illustrate the concept, she developed a graphic that shows five ways to buy pancakes. The most expensive method (top of the staircase) would be going to a “sit down” restaurant such as IHOP or Denny’s. In between, one could go to a fast food restaurant, use microwave pancakes, or a pancake mix. At the “floor” of the staircase would be the least expensive method: making pancakes from scratch. At any level of the staircase, people eat pancakes at a price they choose to pay. Similarly, you can use the step-down principle to reduce the caloric intake of favorite foods. Note to Instructor: Review the food substitution table in the Small Steps to Health and Wealth™ workbook and encourage participants to complete a “staircase” example for a health and a financial practice.
Convert Consumption (Calories and Spending) Into Labor
• Health: How many hours of exercise are needed to burn off extra food? – Is eating a certain food “worth the calories?”
• Finances: How many hours of work are needed in order to buy something (use after-tax dollars)? – Is buying something worth the time worked? http://njaes.rutgers.edu/sshw/workbook/12_Convert_Consumption_Into_Labor.pdf
Presenter
Presentation Notes
The basic premise behind this strategy is to analyze the “cost” of eating something or buying something in relation to a related unit of time. For decisions related to food intake, ask yourself how many hours of exercise it would take to burn off a 300 calorie dessert, for example. A person will burn about 100 calories by walking a mile. Ask yourself the following questions: Do you have the time that it takes to walk 3 miles (100 x 3)? Is that dessert really “worth the calories”? (some desserts will be and others won’t…only you can decide) Awareness of the time that it takes to burn 100 calories is critical to making this strategy work. Buying a pedometer is a great way to experience firsthand how much walking is necessary to get the recommended 10,000 steps per day. Another is paying attention to the digital “calories burned” readout on exercise equipment such as a treadmill or stationary bicycle. With regard to purchasing decisions, ask yourself how many hours of work it would take in order to buy something, and again ask yourself if it is worth the time. Do your analysis with both before- and after-tax dollars. For example, you would need to work 10 hours at $20 an hour (or 20 hours at $10 an hour) to earn $200 before taxes which, in the 25% federal marginal tax bracket, would result in $150 of after-tax income to spend. Note to Instructor: Refer learners to the worksheets in the Small Steps to Health and Wealth™ workbook to calculate the time required to exercise (to burn off a rich dessert) and to work (to pay for a purchase). Ask learners what foods they feel are worth exercising to burn off and which are not? Also, what items are worth spending their hard-earned money on and which are not?
Average U.S. Budget Allocations
How to Develop a Spending Plan That Works
• Add up take-home (net) income
• Total fixed expenses (e.g., rent or mortgage, loan payments, utilities)
• Total flexible expenses (e.g., food, gifts, clothing)
• Pro-rate (1/12 per month) occasional expenses
• Include money for emergencies
• Include money for financial goals
• Balance the bottom line: income = expenses
• Take action: http://njaes.rutgers.edu/money/pdfs/fs421worksheet.pdf
Presenter
Presentation Notes
A spending plan (a.k.a., budget) is a plan for spending and saving your money. This slide lists the steps (in order) needed to develop a spending plan. Five worksheets are included in this unit to help your manage your money. Use the Checklist of Expenses (Exercise I-6) as you track your spending so that you don’t forget any expense categories. Use the Household Expenses: Week by Week (Exercise I-7) worksheet to record your actual expenses. Use the Anticipated Occasional Expenses in Next 12 Months (Exercise I-8) worksheet to determine the annual and monthly cost of periodic expenses (e.g., vacation, quarterly insurance premiums and property taxes). Use the Spending Plan Worksheet (Exercise I-9) to total income and expenses and adjust the numbers so that income equals expenses, including savings. Use the Finding Money to Save worksheet (Exercise I-10) worksheet to identify specific ways to “find” money to save. Spending plans should balance the “bottom line.” It may take several attempts to get income and expense numbers to balance. This is perfectly normal (Hint: do your spending plan in pencil). As you make expense adjustments, try to make small cuts in several spending categories rather than large cuts in only one or two areas. Psychologically, there is less feeling of deprivation.
“Pay Yourself First” • Treat savings as a household “expense” • Give it the priority of a car loan payment • Make savings automatic
– Employer retirement savings plans
– Mutual fund and stock automatic investment plans
– Checking to savings transfers
– Consider doing a “Savings Challenge”
– Need more ideas? See http://www.americasaves.org/
Time + Money = Magic
Source: TIAA-CREF; assumes an 8% average annual return
Include Savings for Your Financial Goals in
Your Spending Plan
Presenter
Presentation Notes
Note to Instructor: Insert non-copyrighted digital clip art, like that shown, on this slide to illustrate common financial goals: Home Car College education for oneself or a family member Child’s wedding Starting a business Vacation/travel Have participants estimate a deadline date and a dollar cost for their goal(s). Refer participants to the Evaluate Your Financial Goals worksheet (Exercise I-4). After identifying their goal(s), time deadline, and dollar cost, learners can use this worksheet to calculate how many months they need to save and the amount of savings required each month to achieve their goal.
Start with Your Bucket List
Financial Goals Reflect Your Dreams and Values Financial goals should be SMART
– Specific – Measurable – Attainable – Realistic – Time-related
• Short-term (less than 3 years) • Intermediate-term (3-10 years) • Long-term (more than 10 years)
http://njaes.rutgers.edu/money/pdfs/goalsettingworksheet.pdf
Presenter
Presentation Notes
Do you have a goal or is it a dream? A dream is vague like “I want to send my child to a good college,” or “I want to be comfortable in retirement.” A goal is specific, achievable, written, and has dates for beginning and ending. For example, “In four years, we will have $20,000 for the down payment on a townhouse,” or, “By the time my child is 18, I will have $40,000 in savings, stocks and bonds to pay part of his or her college tuition.” How do you set a financial goal? Write the goal down answering the questions who, what, when, where, and why. Since this is your goal, begin your goal statement with “I/We”. State exactly what you want to accomplish (e.g., “I will save $5,000 by the end of next year”). Include specific dates and dollar amounts in your goal statement. Then, state exactly what you will do to achieve it and how (e.g., save 10% of pay in a 401(k) plan). Financial goals should be SMART goals. SMART is an acronym for Specific, Measurable, Attainable, Realistic, and Time-Related. The time frame for goals can be short- (less than 3 years), intermediate- (3-10 years), and long-term (more than 10 years). The time frame available for achieving a financial goal is a major factor in investment decisions.
Six Simple Money-Saving Ideas
1. Couponing Use for supermarkets, restaurants, department stores, entertainment venues, etc.
• “Single Play”- Use coupon alone to lower price
• “Double Play”- Sale price or markdown + coupon
• “Triple Pay”- Sale price/markdown + coupon + product rebate or other reward
2. Consigning • Place items with a consignment shop for sale
• Generally only items in very good condition
• Agreed upon split of sale proceeds (e.g., 60/40)
• Designated time period for sale
• Can take proceeds in cash and/or store credit to buy merchandise
3. Thrift Shopping A “Win-Win-Win-Win-Win”
– Non-profit organization gets needed funds
– Donors get tax deduction and satisfaction from helping the non-profit and other people
– Shoppers get great deals on clothes, housewares, furniture, home furnishings, etc.
– The environment is helped by less landfilling and reuse of items
– Local economy is improved
Bag Sales: Thrift Shopping on Steroids!
Personal Experience: Two bags @ $5 = $10 40 usable items @ 25 cents (jackets, suits, pants, blouses, shirts, scarves) 12 other items donated to Fire Department clothing box
4. Renovation • Refinishing furniture
• Gluing or nailing broken furniture
• Caning and rushing chair seats
• Painting and repolishing items
• Removing marks and stains
• Sewing hems, rips and tears, etc.
• See http://pinterest.com/paperstories/home-renovation-ideas/ for great photos
5. Repurposing • The use of something for a purpose other than its original
intended use
• Can be done by modifying an item or simply using it in another way
Examples: •Two tables into a hutch •Wine rack into a towel rack
6. Internet Shopping • ebay: http://www.ebay.com/
• Etsy: http://www.etsy.com/
• craigslist: http://www.craigslist.org/
• Overstock: http://www.overstock.com/
• ioffer: http://www.ioffer.com/
• Bidville: http://www.bidville.com
• Other websites?
Financial Fitness Quiz http://njaes.rutgers.edu/money/ffquiz/
Investing For Your Future Home Study Course
• Free of charge and downloadable
• 11 units; do at your own pace
• Designed for beginning investors
• Monthly investment messages
• www.investing.rutgers.edu
Money Talk: A Financial Guide For Women
http://njaes.rutgers.edu/money/
Money Talk Book Introduction
No matter how much women prefer to lean, to be protected and supported, nor how much men prefer to have them do so, they must make the voyage of life alone, and for safety in an emergency they must know something of the laws of navigation. Elizabeth Cady Stanton, 1892
eXtension Personal Finance Web Site
http://www.extension.org/personal_finance
Take Charge of Your Finances…Starting
Today “If it is to be,
it is up to me”
Each small step is progress, which moves you closer to your goals
Presenter
Presentation Notes
Remember, it is estimated than 9 of 10 women must manage their finances alone during at least one point in their lives. Some women never marry while others lose their spouse due to widowhood or divorce. Those women who are “displaced homemakers” and lack current job skills are at a distinct disadvantage. No one cares as much about your financial future as you do. Therefore, it is important to accept responsibility for your personal finances. The following 10-word quote says it all: “If it is to be, it is up to me.”
