1. Unit 6.3 Part 1 Budget Categories

2. What is a Budget? A plan for spending and saving money Most people think budgets are: –Rigid and inflexible –Painful – who wants to eat Top Ramen every night! –No fun! A budget takes the fun out of money – Mason Cooley

3. Why Budgets Make Sense Budgets help you: –Set priorities –Achieve what’s important to you A good budget is: –Realistic –Ongoing –Clear and easy to use

4. Budget Categories Income –Gross –Net Savings –Emergencies –Long-Term –Retirement –Short-Term Expenses –Fixed –Variable –Discretionary

5. Income: Money Earned Gross income: An individual’s income before taxes. Net income: Income after taxes are paid. Taxes can range from 15% to 31%. It is important that you use your NET INCOME when creating your budget!

6. Taxes and Deductions First job pays $30,000/year. Your salary is your gross income. Take off at least 25% for taxes and other deductions. That’s what’s left for you to spend. Example: Gross salary = $30,000 Minus 25% taxes and deductions- 7,500 Net income $22,500

7. Total Your Monthly Earnings Bonus pay Dividends and interest Commissions Alimony and/or child support Public assistance Pension or retirement income List your salary or self-employment wages as well as any other income you receive, such as:

8. Savings: Pay Yourself First Savings: unspent income Types –Emergencies: Plan to set aside Three – Six months’ living expenses –Long-term: Large ticket items (house, car, college) –Retirement: It’s never to early to start –Short-term: Vacation, clothes, new skis

9. Personal Savings Rate Declining 1974 to 1984 –10% 1985-1994 –Fell to 4.8% 2004 –1.8% 2005 –-0.5% 2006 –-0.7% Hasn’t been negative since the Great Depression

10. Start Saving Young! Save $2,000 per year from age 19 – 26 –$1,035,148 by age 65 Save $2,000 per year from age 27 – 65 –$805,185 by age 65 Time value of money –Invest fewer dollars at a younger age but have 25% more

11. Expenses Expense: A cost to meet a need or pay a debt Types of expenses –Fixed –Variable –Discretionary

12. Fixed Expenses A cost that occurs regularly and doesn’t vary in amount –Rent –Mortgage –Car payment –Insurance premium –School loans –Others?

13. Variable Expenses A cost that occurs regularly but may vary in amount: –Electricity –Water and Garbage –Telephone –Gasoline –Groceries –Others?

14. Discretionary Expenses A cost determined by personal wants that may be controlled –Movies, videos, CDs –Sports –Eating out –Grooming and clothes –Concerts and plays –Vacations –Others?

15. Budget Summary Establish a budget: –Income –Savings –Expenses Fixed Variable Discretionary End up with a budget surplus and you’re a success!

16. Preparing a Budget Budgeting is about: Choosing how to use your money Knowing what your income and expenses are every month

17. Four Steps to Preparing a Budget 1.Keep track of your daily spending 2.Determine what your monthly income and expenses are the month before they are due 3.Decrease spending 4.Increase income

18. Step 1: Keep Track of Daily Spending Many people spend all their money—Do you know where your money goes each month? Have you ever had any money and then spent it? Do you remember exactly what you bought? Control Your Money! Know where your money goes Keep a personal spending diary

19. Set Your Goals Consider them when planning a budget: Be realistic Be specific Have a time frame Say what you want to do Have milestones

20. Daily Spending Diary Watch Spending Closely Use a daily spending diary or log Know where your money goes Cut expenses to save for goals

21. Step 2: Income Income comes in the form of: Allowances Wages from a job Miscellaneous work (like cutting grass) Interest and dividends from investments

22. Expenses: items you pay for each month Housing and car payments Insurance Food and clothing Utility bills Personal, child or pet care Step 2: Expenses Eating out or other entertainment Educational costs

23. Expenses Expenses: Everything you pay for in a time period There are three types of expenses: –Fixed –Variable –Discretionary

24. Fixed Expenses do not change Car payment Rent Variable Expenses might change Electricity Food Discretionary Expenses (can be considered variable expenses) Clothing or entertainment Periodic Expenses (fixed or variable) occur regularly, not frequently Insurance Subscriptions Expenses (continued) Warranties/ Service Agreements License renewals

25. Step 3: Find Ways to Decrease Spending

26. Carrying little cash and controlling your credit card use Not shopping “for fun” Remembering your savings goals Buying only what you need Paying your bills on time to avoid extra fees and charges You can decrease spending by:

27. Step 4: Find Ways to Increase Income Get a second job or a job that pays more to increase income Use certain tax credits that can help you increase your income (or pay fewer taxes so that you get more in your paycheck) You can increase income by:

28. Budgeting Tools These help you manage your budget: Monthly payment schedule (Envelope Method) Monthly payment calendar Computer system (Mint.com)

29. Envelope Method Easiest but least safe method of budgeting method You divide each of your paychecks up into separate expense labeled envelopes When a bill is due, simply take money from envelope and apply towards the bill

30. Monthly Payment Calendar Month ________________________________ SundayMondayTuesdayWednesd ay ThursdayFridaySaturday 12 $400 paycheck $25 savings $150 car $25personal $30 insurance 3 $16600 transportation 45 $25 interest (income) 6 $30 cell phone 7 891011121314 1516 $40 phone bill 17181920 $10 credit card/ loan 21 22232425262728 $40 entertain- ment 2930

31. Computerized Budgeting System Budget is set up and maintained on a computer. –Through your financial institution –Personally setting up a budget using any computer application your comfortable with –Independent websites: Mint.com

32. Help! I Can’t Pay My Bills! Scenario: You add up your bills and the total is $900, but your income is only $600…. What do you do? Think about the bills that would be the most important!

33. Help! I Can’t Pay My Bills! (continued) If you have to choose, think of major obligations first: Pay your rent or mortgage Pay necessary household expenses Pay high- interest loans Talk to your creditors