Budgeting Control Your Cash Flow With a Spending Plan Adapted from National Endowment for Financial Education

Preview Today we will answer these questions: What is a spending plan (budget)? How can a spending plan help me better manage my spending habits? How can I create a spending plan to manage my income and expenses? Jump$tart Coalition Standard: Spending and Saving Competency: Apply strategies to monitor income and expenses, plan for spending, and save for future goals. Standard 1. Develop a plan for spending and saving.

Resist Consumer Culture Marketing and advertising are highly calculated efforts based on research and expertise. Think about this: The layout of a grocery store is designed to maximize your purchases, buy on impulse Millions are spent on tv, social media,and radio advertisements to build brand awareness and generate a call to action. Buy our product! “You deserve this” or “you’ll be cooler” or “there’s no downside to this purchase” Sales people use psychological tactics to get you to “act now” It’s your money, take control of it!

Needs/Wants and Opportunity Cost Knowing the difference between a need and a want is important. Needs: things essential to your health and security Wants: make life more interesting and fun Are your priorities straight? Do you rationalize decisions you make? You need discipline. Opportunity cost: what we give up when we make decisions Ex: Coffee 3 times a week vs. sports cable channels Ex: Buying a nice car now vs. saving for retirement Ex: Buying new outfits vs. paying rent on time

Emergency! Speeding ticket Laptop dies Lost textbook Flat tire Be ready for emergencies! They happen. Can you set $500 aside now just for emergencies? 3-6 months of living expenses as adult. What does the repair or replacement cost? Speeding ticket Laptop dies Lost textbook Flat tire Emergency room trip Lost or broken cell phone

Your budget is your road map Budgets help to: Save to achieve goals – use delayed gratification. Avoid buyer’s remorse – 10 second rule Deal with unexpected or costly events (ex: new tires, prom) Meet all of your financial responsibilities Increase net worth

Steps in Preparing a Budget Before budgeting, know your goals and how long you intend to use the budget. Estimate your total expected monthly net income. Include all sources (allowance, work, etc.) What are your anticipated expenses? Decide how much of your income you want to save. Balance the budget. Income = expenses + savings Income -Expenses -Savings

Step 1: Estimate Your Income Tips to Predict: Use what is known: Average pay Regular allowance Average interest earned Be conservative: When estimating, aim lower rather than higher Don’t count on windfalls Types of Income: Pay Tips Allowance Interest Gift money

Step 2: Estimate Your Expenses Classify Expenses: Fixed: Known, regular payments (Internet bill) Variable: Known but irregular payments (groceries) Periodic /Annual: Known but occasional payments (school fees, insurance) Tips to Estimate: Use averages for variable expenses Split periodic expenses into chunks Example: Plan to set aside $100 a month to pay the annual $1,200 car insurance premium.

Step 3: Determine What You’ll Save For and How Much Do you have a cash surplus? Income – Expenses = Surplus or Defecit With your cash surplus, determine what you’ll save for and how much you’ll save for each goal. Pay Yourself First! Remember to save at least 10% of what you make. Save for: Big ticket items (computer, car, appliances, home improvement, college) Emergencies Retirement Any other goals

Step 4: Does it Balance? Make Adjustments Ideal Situation: Spend at or below your means Income > or = Expenses If Expenses > Income  variable expenses  fixed expenses  income unnecessary expenses If Income > Expenses  Emergency fund  PYF savings funds  any loan obligations

Example Income: Part-time job $320 Allowance $50 Total Income $370 Expenses and Savings: Fixed Expenses Car Insurance $100 Phone $50 Variable Expenses Food $50 Gas $75 Entertainment $50 Saving New Computer $45 Total Expenses and Saving $370

Without a Spending Plan May come up short on money before the next paycheck or allowance payment More likely to not reach long-term spending goals Added stress if struggling to keep up with payments May need to give up something you planned if money needs to be used for unexpected emergencies (bye vacation money!) Give up independence if you need to rely on others for financial help

Review Can you answer these questions? What is a spending plan? How can a spending plan help me better manage my spending habits? How can I create a spending plan to manage my income and expenses?

Maya’s Budget Scenario Maya is a senior in high school who works part time. She is expected to pay her car loan and a few other bills. Help her set up a spending plan to cover her expenses and also allow room to save money for a trip and college tuition. Answer the following as a guide to complete your task: What are Maya’s goals? How much is her income? What are her fixed expenses? How should her variable expenses be adjusted?