1. Introduction to Business, Planning a Budget Slide 1 of 59 Learning Objectives After completing this chapter, you’ll be able to: 1.Explain 1.Explain how budgeting is helpful. 2.List 2.List the five steps in planning a budget. continued

2. Introduction to Business, Planning a Budget Slide 2 of 59 Learning Objectives After completing this chapter, you’ll be able to: 3.Name 3.Name different types of income and expenses. 4.Describe 4.Describe how a computer is used in budgeting.

3. Introduction to Business, Planning a Budget Slide 3 of 59 Why It’s Important Budgeting techniques help you keep track of where your money goes so that you can make it go further.

4. Introduction to Business, Planning a Budget Slide 4 of 59 Key Words money management budget income gross pay deductions net pay continued

5. Introduction to Business, Planning a Budget Slide 5 of 59 Key Words withholding expenditures fixed expenses variable expenses budget variance

6. Introduction to Business, Planning a Budget Slide 6 of 59 Lifestyle Costs Money management is the process of planning how to get the most from your money.

7. Introduction to Business, Planning a Budget Slide 7 of 59 Lifestyle Costs A budget is a plan for using your money in a way that best meets your wants and needs.

8. Introduction to Business, Planning a Budget Slide 8 of 59 Lifestyle Costs A budget includes a record of your expected income, your planned expenses, and your planned savings over a certain period of time.

9. Introduction to Business, Planning a Budget Slide 9 of 59 Figure 28.1 AVERAGE HOUSEHOLD EXPENSES This graph shows how an average household in the United States spends its money. If a family earned about $3,125 a month, how much, (on average) would that family spend on housing?

10. Introduction to Business, Planning a Budget Slide 10 of 59 Lifestyle Costs The five steps in planning a budget are: Setting your goals Estimating your income Estimating your expenses continued

11. Introduction to Business, Planning a Budget Slide 11 of 59 Lifestyle Costs Planning for savings Balancing and adjusting your budget as needed

12. Introduction to Business, Planning a Budget Slide 12 of 59 Set Goals – Step 1 A budget should help you decide which goals you can meet with the amount of money you have.

13. Introduction to Business, Planning a Budget Slide 13 of 59 Consider the following questions … What do I want to accomplish in next month? –Next year? –Next 5 years? What is important to me? Is it practical? Set Goals – Step 1

14. Introduction to Business, Planning a Budget Slide 14 of 59 Estimate Income – Step 2 Your income is the actual amount of money you earn or receive during a given time period. Pay check Interest Allowance

15. Introduction to Business, Planning a Budget Slide 15 of 59 Gross Pay Your gross pay is the total amount of money you earned for a specific time. Before deductions Example: 20 hrs @ $6.50 = $160 $160 is your gross pay for a week Estimate Income – Step 2

16. Introduction to Business, Planning a Budget Slide 16 of 59 Net Pay Your gross pay is reduced by various deductions, or amounts that are taken out of your pay before you receive your paycheck. What are some deductions? Estimate Income – Step 2

17. Introduction to Business, Planning a Budget Slide 17 of 59 Net Pay Your net pay, or take-home pay, is your gross pay minus deductions. Estimate Income – Step 2

18. Introduction to Business, Planning a Budget Slide 18 of 59 Other Income If your net pay is the only income you have to consider, it’s easy to figure your total income. If part of your income is from tips, don’t overestimate how much you expect to receive in tips. Estimate Income – Step 2

19. Introduction to Business, Planning a Budget Slide 19 of 59 Taxes Withholding, or subtracting taxes from a paycheck to be forwarded to the government, may include federal, state, and local income taxes. Includes your contribution to social security Estimate Income – Step 2

20. Introduction to Business, Planning a Budget Slide 20 of 59 Taxes Employers are responsible for forwarding the taxes that are withheld to the government. Estimate Income – Step 2

21. Introduction to Business, Planning a Budget Slide 21 of 59 Taxes Workers who don’t have all taxes withheld from their paychecks must budget for payment of those taxes. Estimate Income – Step 2

22. Introduction to Business, Planning a Budget Slide 22 of 59 Estimate Expenses – Step 3 Items you have to spend money on such as food, rent, and clothing are called expenditures.

23. Introduction to Business, Planning a Budget Slide 23 of 59 Estimate Expenses The two basic types of expenses are: Fixed expenses Variable expenses Estimate Expenses – Step 3

24. Introduction to Business, Planning a Budget Slide 24 of 59 Fixed Expenses Fixed expenses are expenses that occur regularly and that are regularly paid. For example, rent and insurance, What are some other fixed expenses Estimate Expenses – Step 3

25. Introduction to Business, Planning a Budget Slide 25 of 59 Variable Expenses Variable expenses are expenses that fluctuate from month to month. For example, food and entertainment. What are some other variable expenses Estimate Expenses – Step 3

26. Introduction to Business, Planning a Budget Slide 26 of 59 Plan for Savings – Step 4 Savings protect you against expenses that you didn’t budget, that are higher than you expected, or that are completely unexpected.

27. Introduction to Business, Planning a Budget Slide 27 of 59 Balance and Adjust the Budget – Step 5 The total estimated income for a period should equal the total estimated expenses.

28. Introduction to Business, Planning a Budget Slide 28 of 59 Balance and Adjust the Budget The difference between how much you planned to spend and how much you actually spent is the budget variance. If total expenses > total income, make adjustments What adjustments could be made? Balance and Adjust the Budget – Step 5

29. Introduction to Business, Planning a Budget Slide 29 of 59 Graphic Organizer Planning a Budget Graphic Organizer Set Goals Estimate Income Plan for Savings Balance and Adjust the Budget Estimate Expenses

30. Introduction to Business, Planning a Budget Slide 30 of 59 Fast Review 1.What is the difference between gross pay and net pay? 2.Give some examples of deductions. continued

31. Introduction to Business, Planning a Budget Slide 31 of 59 Fast Review 3.What types of taxes are often withheld from a paycheck? 4.Give examples of variable expenses. continued

32. Introduction to Business, Planning a Budget Slide 32 of 59 Fast Review 5.What is budget variance?

33. Introduction to Business, Planning a Budget Slide 33 of 59 A Sample Budget Let’s follow the steps that a young couple, Michael and Nora Kemal, used to set up a budget.

34. Introduction to Business, Planning a Budget Slide 34 of 59 Step 1: Setting Goals First, the Kemals drew up a list of their goals, both short-term and long- term. Then decided which wants were most important to them

35. Introduction to Business, Planning a Budget Slide 35 of 59 Step 2: Estimating Income Michael, a salesperson, earns a gross annual income of $19,000. Nora is a management trainee and earns $21,500 a year.

36. Introduction to Business, Planning a Budget Slide 36 of 59 Step 2: Estimating Income Although the Kemals earn a total of $40,500, their take-home pay is only about $31,200. They used that amount in their planning.

37. Introduction to Business, Planning a Budget Slide 37 of 59 Step 2: Estimating Income If the Kemals had an income from investments or rental properties, they would include this income in their budget.

38. Introduction to Business, Planning a Budget Slide 38 of 59 Step 3: Estimating Expenses The Kemals kept a record of actual expenses for the past several months. Then they made a list of planned expenses and savings for the year. List included fixed and variable expenses

39. Introduction to Business, Planning a Budget Slide 39 of 59 Step 4: Planning for Savings The Kemals’ savings budget reflects their goals. To begin saving for a vacation, they’re cutting their entertainment expenses.

40. Introduction to Business, Planning a Budget Slide 40 of 59 Figure 28.2 THE KEMALS’ FAMILY BUDGET A budget should be broken down into annual and monthly amounts for each category. Identify how much the Kemals spend on insurance payments.

41. Introduction to Business, Planning a Budget Slide 41 of 59 Step 4: Planning for Savings When they developed their budget, Michael and Nora had to be sure that the total income figure was the same as the total for planned expenses and savings.

42. Introduction to Business, Planning a Budget Slide 42 of 59 Step 5: Balancing and Adjusting the Budget After their budget was prepared, the Kemals kept records of their actual expenses and organized their expenses into various categories.

43. Introduction to Business, Planning a Budget Slide 43 of 59 Step 5: Balancing and Adjusting the Budget The Kemals divided the yearly figures by 12 to estimate how to manage their money from one month to the next.

44. Introduction to Business, Planning a Budget Slide 44 of 59 Step 5: Balancing and Adjusting the Budget The Kemals compared their monthly totals with their budgeted amounts to see if they were keeping within their budget.

45. Introduction to Business, Planning a Budget Slide 45 of 59 Balancing the Budget The Kemals’ total expenses were close to their total income for the month. They were living within their budget.

46. Introduction to Business, Planning a Budget Slide 46 of 59 Adjusting the Budget The Kemals decided to increase their clothing budget by the amount they reduced the food budget. The Kemals have adjusted their budget according to their needs.

47. Introduction to Business, Planning a Budget Slide 47 of 59 Using a Computer for Budgeting With a computerized budgeting program, you can store your budgeted amounts and enter your expenses as they occur or at the end of the month.

48. Introduction to Business, Planning a Budget Slide 48 of 59 Using a Computer for Budgeting The computer can give you a quick analysis of total expenses, including amounts that are over and under the budget.

49. Introduction to Business, Planning a Budget Slide 49 of 59 Using a Computer for Budgeting In addition, the computer can help with “what if” situations. For example, what if Nora Kemal’s income increased by ten percent, or their rent increased by $50 a month?

50. Introduction to Business, Planning a Budget Slide 50 of 59 Fast Review 1.What is the Kemals’ gross income and net income? 2.How did the Kemals’ use their annual figures to come up with a monthly budget?