Planning a Budget Chapter 28 5/30/2019

What happens if we spend more than we earn? 5/30/2019

Money Management The process of planning how to get the most from your money. Do you do a good job managing your money? What could you do better? 5/30/2019

What is a budget? A budget is a plan for using your money in a way that best meets your needs and wants. A budget puts you in control. It helps you determine in advance how much money you will spend and what you will spend it on. 5/30/2019

Why Budgets Make Sense Budgets help you: A good budget is: Realistic Set priorities Achieve what’s important to you A good budget is: Realistic Ongoing Clear and easy to use A good budget is: Flexible: It should change as your needs change. Ongoing: It’s not a one-time event. A budget should be part of your everyday life. Clear and easy to use: 12 page spreadsheets are out! 5/30/2019

Step One: Estimate Income Where to start? Step One: Estimate Income How much money will you likely receive next month? 5/30/2019

Step Two: Estimate Expenses What would you like to buy, what will it cost, and why do you want it? Sometimes answering the “why” question honestly will help you think through your purchasing goals and put them in the order of importance. 5/30/2019

Real World – Out on Your Own When you work at a job, do you get to keep all of the money that you earn? Why not? Where does it go? 5/30/2019

Social Security Tax (6.2%) Medicare Tax (1.45%) Federal Income Tax (approx. 15%) State Income Tax (approx. 3%) Health Insurance Retirement 5/30/2019

You work 40 hours a week for $10.00 an hour. Gross Pay - the total amount of money you earned for a specific period of time. It is the amount before deductions. You work 40 hours a week for $10.00 an hour. Gross pay is $400.00 a week 5/30/2019

Deductions: Social Security Tax: $400 x 6.2% = $24.80 Medicare Tax: $400 x 1.45% = $5.80 Federal Income Tax: Single w/1 exemption $37.00 State Income Tax: $12.00 Total Deductions: $79.60 Total % taken out: 19.90% 5/30/2019

Net Pay – your take-home pay. Gross pay minus deductions. $400.00 - $79.60 = $320.40 Amount used in budget 5/30/2019

When on your own, what will you need to spend your money on? Housing Transportation Food Clothing 5/30/2019

Amount does not change…it is fixed. Fixed Expenses – expenses that occur regularly and that are regularly paid. Amount does not change…it is fixed. Rent Insurance Car 5/30/2019

Variable expenses – expenses that fluctuate or change from month to month. Food Clothing Entertainment Recreation 5/30/2019

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 5/30/2019

A budget isn’t complete without a regular plan for savings. 5/30/2019

Savings: Pay Yourself First Savings: unspent income Types Emergencies: Plan to set aside three 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 A good rule of thumb is to keep at least three months’ worth of living expenses in your savings account just in case you run into an emergency like losing your job or your car breaks down. 5/30/2019

Have money work for you, not you work for money! Emergency Fund - protects you against expenses that you did not budget for. You should try to budget 10% of your income for long-term savings and investing. Have money work for you, not you work for money! 5/30/2019

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 The personal savings rate is, essentially, the amount of after-tax income left once household bills are paid. As a percentage of income, it's declining. The personal savings rate used to be 10 percent of disposable income from 1974 to 1984, according to the Bureau of Labor Statistics. It fell to 4.8 percent by 1994, and was negative for all of 2005. As of January, the personal savings rate was minus 0.7 percent. Americans not only spent all of their after-tax income in 2005 but had to dip into previous savings or increase borrowing. The savings rate has been negative for an entire year only twice before — in 1932 and 1933 — two years when the country was struggling to cope with the Great Depression, a time of massive business failures and job layoffs. One major reason that consumers felt confident in spending all of their disposable incomes and dipping into savings last year was that a booming housing market made them feel more wealthy. As their home prices surged at double-digit rates, that created what economists call a “wealth effect” that supported greater spending Source: The Bureau of Labor Statistics, March 2006 5/30/2019

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 Save $2,000 per year from age 19 – 26 Invest a total of $16,000 over 8 years and then don’t invest anything else Save $2,000 per year from age 27 – 65 Invest a total of $78,000 over 39 years Based on 10% annual rate of return Source: Smart Women Finish Rich, pg 223. 5/30/2019

Investment Scenarios: Invest $100 per month for 20 years in an aggressive growth fund earning on average 10% per year: $75,936.88 Invest $200 per month for 20 years in an aggressive growth fund earning on average 10% per year: $151,873.77 5/30/2019

Invest $200 per month for 50 years in an aggressive growth fund earning on average 10% per year: $3,464,878.16 5/30/2019

Budget Variance – the difference between how much you planned to spend and how much you actually spent. 5/30/2019

Net pay per month: $320.40 x 4 = $1,281.60 Expenses: Rent $500 Car $200 Utilities $100 Food $200 Savings $120 Clothing $100 Total Expenses $1,220 Budget Variance $61.60 5/30/2019

Chapter 28 Bookwork Fast Review (page 460) #’s 1-5 Using Business Key Words (page 466) #’s 1-11. 5/30/2019