Budgets “Directly or indirectly, you’ve probably already spent some money today.”
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Transcript of Budgets “Directly or indirectly, you’ve probably already spent some money today.”
Personal Budget
• A working tool that helps you take control of your money
• A plan for managing your money, for a specific period of time
• Directs the flow of cash received towards financial goals
• Helps you achieve the things you value most
• Is flexible and serves as a guideline
…cont Personal Budget
• It takes discipline to stick to a budget!• In a working budget, spending and
income balance each other out; expenses should NOT exceed income!
• Because of limited resources, people who use a budget must make choices about how to spend their money– Opportunity Costs– Delayed Gratification
Two Simples Parts to a Budget
• Income (positive value)– Money received from any source
(wages, interest, gifts, allowances, etc.)
• Spending/Expenses (negative value)– The money you spend on various
items (needs and wants)
Income (positive value)
• Gross Income– The money you make before any deductions
• Net Income– The money you make after deductions
– Common Deductions:
• Union dues, health insurance, contributions to savings plans, contributions to charities, TAXES
• Four common Tax deductions:– Federal Income Tax– State Income Tax– Social Security Tax (FICA Tax)– Medicare Tax (FICA Tax)
Spending/Expenses (negative value)
• Fixed Expenses– Any expense/deduction from income that stays
consistent (the same) each month/payment
• Paying yourself first (P.Y.F.), Rent, child care, health insurance, contributions to savings, IRA contributions, loan payments, insurance, etc.
• Variable Expenses– Any expense/deduction from income that
changes each month/payment
• Utilities, phone, clothing, personal items, gas, food, entertainment, etc.
• Use comparison shopping to cut variable expenses!
– Coupons, buying in bulk, garage sales, thrift stores, etc.
Keeping Track of Your Money
• Checking Account– Checks, ATM card, Debit card– Charges, fees, and other costs
• Minimum balances, annual or monthly fees, overdraft protection, insufficient funds charge, ATM fees
• Good Record Keeping– The “Envelope System”– Checking account statements– Savings and investments– Insurance– Tax documents– Pay stubs– Loan papers– Big-ticket item receipts and warranties
Preparing a Practical Budget
• To prepare a budget, follow these steps:– Step 1: Set Your Financial Goals– Step 2: Estimate Your Income– Step 3: Budget for Unexpected
Expenses and Savings– Step 4: Budget for Fixed Expenses– Step 5: Budget for Variable
Expenses– Step 6: Record What You Spend– Step 7: Review Spending and
Saving Patterns
Budget for Pat Doe for the week of June 6th
Money coming in (+ value):
Work (after taxes)
Gifts/Allowance
Other
Total Income
$ 190
$ 190
Money going out (- value):
Fixed Expenses
P.Y.F.
Car Payment
Auto Insurance
Total Fixed Expenses
Variable Expenses
Gas
Food
Clothing
Fun Stuff
Big Events
Total Variable Expenses
$ 20
50
25
$ 25
20
15
5
30
$ 95
$ 95
Total Outgoing (fixed + variable expenses) $ 190
Any money left over? (income minus outgoing) $ 0
Charting Where Your Money Goes
EXPENSE PLANNED $
% OF TOTAL $
Savings $30 10%
Clothing $45 15%
Transportation $90 30%
Food $60 20%
Entertainment $45 15%
School $15 5%
Other $15 5%
Total $300 100%
Breaking Down a Dollar
Savings Clothing School Other Transportation Food Entertainment
10% 15% 5% 5% 30% 20% 15%
Graphing Where Your Money Goes
17%
6%
6%
32%
22%
17%
Clothing School OtherTransportation Food Entertainment
How to Budget Successfully
• A budget should have several important characteristics:– 1st: a good budget is carefully planned
• Your estimates cannot be wild guesses, your spending categories must cover all expenses
– 2nd: a good budget is practical• If your first full-time job pays you
$1,500/month, don’t expect to buy a sports car anytime soon
– 3rd: a good budget is flexible• Throughout your life you will encounter
unexpected expenses and probably unexpected shifts in income as well
• Your budget needs to be easy to revise when changes occur
– 4th: a good budget must be written and easily accessible
Personal Balance Sheet
• Balance Sheet (net worth statement)– A financial statement that lists
the items of value that you own, the debts that you owe, and your net worth
– Net Worth• The difference between the
amount that you own and the debts that you owe
• A measure of your current financial position
Personal Balance Sheet
• To create a Personal Balance Sheet, follow these steps:
– Step 1: Determine Your Assets
– Step 2: Determine Your Liabilities
– Step 3: Calculate Your Net Worth
– Step 4: Evaluate Your Financial Situation
Step 1: Determine Your Assets
• Assets– Any items of value that you own,
including cash, property, personal possessions, and investments
• Liquid Assets
• Real Estate
• Personal Possessions
• Investment Assets
Liquid Assets
• Cash and items that can be quickly converted to cash– Money in your savings and
checking accounts
Real Estate Assets
• Land that a person/family owns and anything that is on it, such as a house or any other building
• Amount recorded on the Balance Sheet is the property’s Market Value– Market Value
• The price at which you could sell the property
Personal Possession Assets
• Cars and any other “valuable” belongings that are not real estate– No old clothes or used CDs
• May list personal possessions on the Balance Sheet at their original cost OR market value
Investment Assets
• Retirement accounts and securities such as stocks and bonds
• Amount you record should reflect the value of the assets at the time when you prepare the balance sheet
Step 2: Determine Your Liabilities
• Liabilities– The debts that you owe
• Current Liabilities– Short-term debts that have to be paid within a year
• Medical bills, cash loans, taxes, and insurance payments
• Long-Term Liabilities– Debts that don’t have to be fully repaid in a year
• Car loans, student loans, and mortgage loans
• Liabilities includes only money that you will owe for longer than a month– A telephone bill doesn’t qualify as a liability– Utility bills, etc. don’t qualify as a liability
Step 3: Calculate Your Net Worth
• Formula– Assets – Liabilities = Net Worth– $3,000 - $700 = $2,300
• Net Worth is only an indication of your general financial situation– A net worth of $62,300 doesn’t mean that you
have $62,300 to spend. Much of your wealth may be in stocks, real estate, and personal possessions, which can’t be easily converted to cash.
• Although you may have a high net worth, you can still have trouble paying your bills
• Insolvency– The condition that occurs if your liabilities are
greater than your assets
Step 4: Evaluate Your Financial Situation
• You can use a balance sheet to track your financial progress
• Up-date your balance sheet, or make a new one, every few months
• Chart changes over time
• You can increase your net worth by increasing your savings, increasing the value of your investments, reducing your expenses, and/or reducing your debts
Debt Ratio
• Liabilities divided by Net Worth
• $25,000 / $50,000 = 0.5
• Compares your Liabilities to your Net Worth
• A low Debt Ratio is desirable
Liquidity Ratio
• Liquid Assets divided by monthly Expenses
• $10,000 / $4,000 = 2.5
• Indicates the number of months you would be able to pay your living expenses in case of a financial emergency
• The higher the Liquidity Ratio, the better