BUDGETING PROCESS How will you spend your money? "A budget tells us what we can't afford, but it doesn't keep us from buying it." — William Feather

Short-term/Long-term Goals Short-term Goals: are goals you plan on achieving within a year. Should limit spending on short-term goals, for long- term Short vacation New T.V. Long-term Goals: are goals beyond a year. Usually correspond with life-goals College Home

SMART Financial Goals Specific Measurable Attainable Realistic State exactly what is to be done with the money involved Specific Write the exact dollar amount the goal is for Measurable Determine how it can be reached, which is often determined by the individual’s budget Attainable Do not set goal for something unattainable or unrealistic Realistic Specifically state when the goal needs to be reached Time Bound

SMART Financial Goal Goal – I want to buy a new car SMART goal – Specific – I plan to save for a down payment on a new car Measurable – I plan to save $5,000 for a down payment on a new car Attainable – I plan to save $5,000 for a down payment on a new car by saving $200 from every paycheck Realistic – It is realistic to save $200 from each paycheck for a down payment on a car because I usually waste the money on unnecessary items instead of saving it Time Bound – I plan to save $5,000 for a down payment on a new car by saving $200 from each paycheck for two years.

Education Goals Help individuals prepare for success in the workplace Examples include: Earning an A on an upcoming quiz Attending college Participating in extra-curricular activities Include both short-term and long-term goals Provide guidance and direction Enable individuals to reach financial goals

SMART Education Goal Goal – “I want to attend college.” SMART goal – Specific – I want to attend a four year college Measurable – Because I want to attend a four year college, I will earn a B in algebra Attainable – Because I want to attend a four year college, I will earn a B in algebra this semester Realistic – Because I want to attend a four year college, I will earn a B in algebra this semester to prepare me for the college entrance exam Time Bound – Because I want to attend a four year college, I will earn a B in algebra this semester to prepare me for the college entrance exam when I am a junior in high school

What is Missing? Find the missing element (specific, measurable, attainable, realistic, or time bound) in the following financial goals Financial Goal #1 I plan to save $5,000 for college living expenses in four years.

What is Missing? Financial Goal #1 Answer: Attainable

What is Missing? Find the missing element (specific, measurable, attainable, realistic, or time bound) in the following financial goals Financial Goal #2 I plan to save for a new computer by saving $150 each month for one year.

What is Missing? Financial Goal #2 Answer: Measurable

What is Missing? Find the missing element (specific, measurable, attainable, realistic, or time bound) in the following financial goals Financial Goal #3 I plan to save $2,500 by saving $105 each month for 2 years.

What is Missing? Financial Goal # 3 Answer: Specific

What is Missing? Find the missing element (specific, measurable, attainable, realistic, or time bound) in the following financial goals Financial Goal #4 I plan to save $1,500 to buy a used car by saving $75 from each paycheck

What is Missing? Financial Goal # 4 Answer: Time Bound

What is Missing? Find the missing element (specific, measurable, attainable, realistic, or time bound) in the following financial goals Financial Goal #5 I plan to save $2,000 to pay for a new computer by saving my whole paycheck for the next 6 months

What is Missing? Financial Goal # 5 Answer: Realistic

Determining Income Now that you know what goals you want to plan for you need to take the beginning steps to creating a budget. You don’t want to base your budget on your gross pay! Gross Pay: the salary or wages you earn before taxes and deductions have been withheld. Net Pay: is the amount of money you take home after taxes and other deductions have been subtracted from your gross pay. (what you can spend)

Determining Net Worth When looking at your overall income and expenses sometimes it is important to look at your assets and liabilities. Many times when you plan on acquiring loans from a bank they want you to determine your net worth. It is a simple formula to calculate. But sometimes scary to look at. Assets: What you own. Liabilities: What you owe. Assets – Liabilities = Net worth Depreciated value: the decrease in value of an item over time

Balancing Spending It is important to balance your spending when you are creating your budget. You want to be able to save for long-term financial and educational plans. Control short-term spending. Save now for later. People who evaluate each step, are more likely to reach their intended goals. A good budget still allows you to enjoy yourself now, and helps you achieve your life goals. Budgeting requires you to prioritize (or rank) goals.

Fixed and Flexible Expenses Fixed Expenses: are amounts you have already committed to spend. Car payment, mortgage, insurance, cable, etc… You know how much you will have to pay each month. You can plan ahead to save money. Doesn’t have to be a monthly bill, can be yearly, semi- annually or every other month.

Fixed and Flexible Expenses Flexible Expenses: amounts that you can choose to spend or not to spend. Opportunity Costs: what do you give up now, when you don’t choose to spend your money. (not in student notes) Clothes, some household items, music, electronics. Luxury Goods: are goods that have special qualities that make them more expensive than alternative goods. Example: sports car, jewelry Almost always considered flexible.

Create Your Budget Worksheet Your income is a limited resource. You have to pick and choose what to buy. You can make sure you are using your money for things you want by making a plan. Instead of buying coffee, you might want to save for a new car.

Budgeting Steps Investigate current spending habits. To do this you need to create a budget worksheet. Budget Worksheet: is a planning document on which you record your expected and actual income and spending over a short-time. A budget worksheet compares what you think you spend to what you actually spend.

Budgeting Steps Cont. Create a worksheet Divide a worksheet into four columns. Estimate your income Be sure to use your net income. Its easy to estimate income that is the same each month. Only include income you know you will receive.

Budgeting Steps Cont. Estimate your Expenses and Savings List fixed expenses first because you have committed to pay them. Next list flexible, if you don’t know the amount, take an average of the last few months. Plan your savings, should not be just what is left over at the end of the month.

Budgeting Steps Cont. Record Your Actual Income and Expenses As you receive income and make purchases during the month, file you amounts in the appropriate folders. At the end of the month, add up the amounts and record the final amount next to the estimated amount.

Budgeting Steps Cont. Calculate the difference Now compare your expected amounts to your actual amounts. Subtract the expected amounts from the actual amounts. This will give you an amount that is either over or under your budgeted amount.

Budget Pitfalls Some people get too specific. Keep it simple. Some people don’t predict the correct amount of their flexible expenses. Don’t lump too many expenses under miscellaneous. Makes it hard to plan for. Some give up because they think it takes too much time and effort. Setting aside an hour each is enough time to maintain a budget. Plus it helps you achieve your life-goals.

Improving Your Budget Review your budget goals. Make sure they are reasonable and attainable. Ask yourself do I need it? How else could I spend the same money? Try not to pay more than 25% of income on housing Make sure an adequate amount is in the form of a liquid asset. Liquid Assets: can be converted to cash in a short period of time. Always write down budget goals. Estimate 20% of a new salary going to taxes.

Yearly Budget After you go through the steps of following a monthly budget it is important to reevaluate it at the end of the year. Many times you have over spent or under spent in a variety of categories. (Food, entertainment) This is the time you make sure you are staying within your overall budget. Make adjustments and see what is working and what is not working. If you have a category that is up and down each month then you need to take the total for the year and divide by 12. That would give you a good number to start with for the new year. It’s a plan, not just information. Make sure it is meeting the needs of everyone in the family. Adjust it and communicate with one another. You need a plan in order to save. It doesn’t just happen.

Final Thoughts… It’s a plan, not just information. Make sure it is meeting the needs of everyone in the family. Adjust it and communicate with one another. If everyone is not on board the budget will not work. If it fails, try again and keep working as a team.