1. Chapter 16 Planning a Budget

2. Why It’s Important Budgeting techniques help you keep track of where your money goes so that you can make it go further.

3. Lifestyle Cost Income is a limited resource Most people want more goods and services then they can buy with their income Money management is the process of planning how to get the most from your income. With planning you can figure out how to use the income you have to buy the things you really want or need

4. Lifestyle Cost A budget is a plan for using your income in a way that best meets your wants and needs. It’s like a road map or guide that you set up and try to follow A budget includes a record of your expected income, your planned expenses, and your planned savings over a certain period of time.

5. Lifestyle Cost You avoid wasting money on things that are not very important to you, because you decide in advance how you will use your income. A good budget help you set priorities for spending and saving and keeps track of how you are managing your money

6. Lifestyle Cost Planning a budget is easier if you divide the process into five steps The five steps in planning a budget are:  Setting your goals  Estimating your income  Estimating your expenses  Planning for savings  Balancing and adjusting your budget as needed

7. Setting Your Goals As you prepare to set your monetary goals you have to consider several questions What do I want to accomplish in the next month? The next year? The next five years? Are my goals practical? It’s useless to set a goal of buying a new computer in one year if your total income of the year is less than the cost of the computer.

8. Setting Your Goals A budget should help you decide which goals you can meet with the amount of money you have

9. Estimate Income Knowing how much money you have available is an important step in budgeting process Your income is the actual amount of money you earn or receive during a given time period. If you get a weekly allowance, that is considered income

10. Estimate Income Wages you earn as a stock clerk at a supermarket or tips you get waiting tables are income Any interest you earn on savings account or money from investments is also part of your income.

11. Gross Pay If you have a job, you may remember your surprise when you got your first paycheck. Your gross pay is the total amount of money you earned for a specific time. For example, if you worked 20 hours a week at $6.50 an hour, your gross pay is $130 for the week

12. Net Pay You don’t get to keep all of your gross pay. Your gross pay is reduced by various deductions, or amounts that are taken out of your pay before you receive your paycheck. Deductions include things like taxes, health insurance, retirement, and union dues. Your net pay, or take-home pay, is your gross pay minus deductions.

13. Other Income If your net pay is the only income you have to consider, it’s easy to figure your total income. If you are budgeting for a family and other members contribute to the total income, include their take home pay in the budget If part of your income is from tips, don’t overestimate how much you expect to receive in tips.

14. Taxes Full-time workers pay several kinds of taxes, which are deducted from their paychecks. Withholding, or subtracting taxes from a paycheck to be forwarded to the government, may include federal, state, and local income taxes. In addition the workers contribution to social security and Medicare is withheld

15. Taxes Employers are responsible for forwarding the taxes that are withheld to the government. Workers who do not have taxes withheld from their paychecks must budget for them. Self-employed persons, for example pay their taxes directly to the government

16. Estimate Expenses You have to plan for a variety of expenses Items you have to spend money on such as food, rent, and clothing are called expenditures. You must plan for rent, food, transportation, and any unexpected expenses, such as medical visits. You also have to take into account the rising costs of some expenses, such as gas

17. Estimate Expenses If a budget does not include all estimated expenses, real problems might arise. There are two basic types of expenses you have to consider. The two basic types of expenses are:  Fixed expenses  Variable expenses

18. Fixed Expenses Fixed expenses are expenses that occur regularly and that are regularly paid. They include such things as rent, insurance, and car payments The amount of a fixed expense might change from time to time, but usually stay the same over long periods of time. You can not reduce or avoid fixed expense without creating problems

19. Variable Expenses Variable expenses are expenses that fluctuate from month to month. They include expenses such as food, long distance phone charges, entertainment, and gifts. The amount for these expenses usually vary from month to month A good way to begin estimating your expenses is to look at how much you paid for similar items in the past

20. Plan for Savings A budget is not complete without a regular plan for savings Not only will savings make it possible for you to meet future wants, but they are also a protection Savings protect you against expenses that you didn’t budget, that are higher than you expected, or that are completely unexpected.

21. Balance and Adjust the Budget To maintain a personal budget requires balancing and adjusting the budget The total estimated income for a period should equal the total estimated expenses. The difference between how much you planned to spend and how much you actually spent is the budget variance.

22. Balance and Adjust the Budget If total expenses are greater than total income, you have to make some changes in the budget You must either decrease your expenses or increase your income.

23. A Sample Budget Let’s follow the steps that a young couple, Michael and Nora Kemals, used to set up a budget. They want to plan their spending so they can get the most of their money. They decided to set up a monthly budget and an annual budget

24. Step 1: Setting Goals First, they drew up a list of their goals, both short-term and long-term. They decided which of their wants were most important to them Setting goals is the first step in developing a spending plan that will meet as many of their goals as possible

25. Step 2: Estimating Income Next they need to estimate their income for the year. They want to know how much money they would have available during the planning period Michael, a salesperson, earns a gross annual income of $19,000. Nora is a management trainee and earns $21,500 a year.

26. Step 2: Estimating Income Although they earn a total of $40,500, their take-home pay is only about $31,200. They used that amount in their planning. If the Kemals had an income from investments or rental properties, they would include this income in their budget.

27. Step 3: Estimating Expenses Next, the Kemals estimated their expenses for the planning period 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. The list included their fixed expenses like rent, and variable expenses like food and clothing

28. Step 4: Planning for Savings The Kemals’ savings budget reflects their goals. To begin saving for a vacation, they’re cutting their entertainment expenses. 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.

29. 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. They organized their expenses into various categories such as car exp., rent, and entertainment After they had estimated annual expenses and income, the Kemals developed a monthly budget

30. 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.

31. Step 5: Balancing and Adjusting the Budget At the end of the month, the Kemals compared their monthly totals with their budgeted amounts to see if they were keeping within their budget. When they compared their monthly budget amounts with their actual expenses, the Kemals found that they spent less than they had budgeted for.

32. Step 5: Balancing and Adjusting the Budget They spent less on food, utilities, car expenses, and entertainment On the other hand, they spent more than budgeted amounts for health care, clothing, and household expenses. Even with these differences the Kemals, had money left over at the end, which means they where living within their means.

33. Adjusting the Budget After looking at their actual expenses, the Kemals decided to make some changes in their budget They chose to reduce the amount budgeted for food. They decided not to decrease the other budgeted amounts, since the utilities and car expense may be higher in the future.

34. Adjusting the Budget They increased the budget for clothing and household expenses, the two areas in which their expenses were more than the budgeted amounts. They increased those two amounts by the amount they reduced the food budget. The Kemals have adjusted their budget according to their needs.

35. Using a Computer for Budgeting Many people have computer in their homes Several kinds of software programs are available for setting up and maintaining a household budget 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.

36. 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. 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?

37. Using a Computer for Budgeting What if they also wanted to save for a new computer How much more would they have to cut from others to be able to buy a computer in one year By using computers people could quickly see how changes would affect their budget