Budgets “Directly or indirectly, you’ve probably already spent some money today.”

Personal Budget A working tool that helps you take control of your money A plan for managing your money, for a specific period of time Directs the flow of cash received towards financial goals Helps you achieve the things you value most Is flexible and serves as a guideline

…cont Personal Budget It takes discipline to stick to a budget! In a working budget, spending and income balance each other out; expenses should NOT exceed income! Because of limited resources, people who use a budget must make choices about how to spend their money –Opportunity Costs –Delayed Gratification

Two Simples Parts to a Budget Income (positive value) –Money received from any source (wages, interest, gifts, allowances, etc.) Spending/Expenses (negative value) –The money you spend on various items (needs and wants)

Income (positive value) Gross Income –The money you make before any deductions Net Income –The money you make after deductions –Common Deductions: Union dues, health insurance, contributions to savings plans, contributions to charities, TAXES Four common Tax deductions: –Federal Income Tax –State Income Tax –Social Security Tax (FICA Tax) –Medicare Tax (FICA Tax)

Spending/Expenses (negative value) Fixed Expenses –Any expense/deduction from income that stays consistent (the same) each month/payment Paying yourself first (P.Y.F.), Rent, child care, health insurance, contributions to savings, IRA contributions, loan payments, insurance, etc. Variable Expenses –Any expense/deduction from income that changes each month/payment Utilities, phone, clothing, personal items, gas, food, entertainment, etc. Use comparison shopping to cut variable expenses! –Coupons, buying in bulk, garage sales, thrift stores, etc.

Keeping Track of Your Money Checking Account –Checks, ATM card, Debit card –Charges, fees, and other costs Minimum balances, annual or monthly fees, overdraft protection, insufficient funds charge, ATM fees Good Record Keeping –The “Envelope System” –Checking account statements –Savings and investments –Insurance –Tax documents –Pay stubs –Loan papers –Big-ticket item receipts and warranties

Preparing a Practical Budget To prepare a budget, follow these steps: –Step 1: Set Your Financial Goals –Step 2: Estimate Your Income –Step 3: Budget for Unexpected Expenses and Savings –Step 4: Budget for Fixed Expenses –Step 5: Budget for Variable Expenses –Step 6: Record What You Spend –Step 7: Review Spending and Saving Patterns

Budget for Pat Doe for the week of June 6 th Money coming in (+ value): Work (after taxes) Gifts/Allowance Other Total Income $ 190 Money going out (- value): Fixed Expenses P.Y.F. Car Payment Auto Insurance Total Fixed Expenses Variable Expenses Gas Food Clothing Fun Stuff Big Events Total Variable Expenses $ $ $ 95 Total Outgoing (fixed + variable expenses)$ 190 Any money left over? (income minus outgoing)$ 0

Charting Where Your Money Goes EXPENSEPLANNED $ % OF TOTAL $ Savings$3010% Clothing$4515% Transportation$9030% Food$6020% Entertainment$4515% School$155% Other$155% Total$300100%

Breaking Down a Dollar SavingsClothingSchoolOtherTransportationFoodEntertainment 10%15%5% 30%20%15%

Graphing Where Your Money Goes

How to Budget Successfully A budget should have several important characteristics: –1 st : a good budget is carefully planned Your estimates cannot be wild guesses, your spending categories must cover all expenses –2 nd : a good budget is practical If your first full-time job pays you $1,500/month, don’t expect to buy a sports car anytime soon –3 rd : a good budget is flexible Throughout your life you will encounter unexpected expenses and probably unexpected shifts in income as well Your budget needs to be easy to revise when changes occur –4 th : a good budget must be written and easily accessible

Personal Balance Sheet Balance Sheet (net worth statement) –A financial statement that lists the items of value that you own, the debts that you owe, and your net worth –Net Worth The difference between the amount that you own and the debts that you owe A measure of your current financial position

Personal Balance Sheet To create a Personal Balance Sheet, follow these steps: –Step 1: Determine Your Assets –Step 2: Determine Your Liabilities –Step 3: Calculate Your Net Worth –Step 4: Evaluate Your Financial Situation

Step 1: Determine Your Assets Assets –Any items of value that you own, including cash, property, personal possessions, and investments Liquid Assets Real Estate Personal Possessions Investment Assets

Liquid Assets Cash and items that can be quickly converted to cash –Money in your savings and checking accounts

Real Estate Assets Land that a person/family owns and anything that is on it, such as a house or any other building Amount recorded on the Balance Sheet is the property’s Market Value –Market Value The price at which you could sell the property

Personal Possession Assets Cars and any other “valuable” belongings that are not real estate –No old clothes or used CDs May list personal possessions on the Balance Sheet at their original cost OR market value

Investment Assets Retirement accounts and securities such as stocks and bonds Amount you record should reflect the value of the assets at the time when you prepare the balance sheet

Step 2: Determine Your Liabilities Liabilities –The debts that you owe Current Liabilities –Short-term debts that have to be paid within a year Medical bills, cash loans, taxes, and insurance payments Long-Term Liabilities –Debts that don’t have to be fully repaid in a year Car loans, student loans, and mortgage loans Liabilities includes only money that you will owe for longer than a month –A telephone bill doesn’t qualify as a liability –Utility bills, etc. don’t qualify as a liability

Step 3: Calculate Your Net Worth Formula –Assets – Liabilities = Net Worth –$3,000 - $700 = $2,300 Net Worth is only an indication of your general financial situation –A net worth of $62,300 doesn’t mean that you have $62,300 to spend. Much of your wealth may be in stocks, real estate, and personal possessions, which can’t be easily converted to cash. Although you may have a high net worth, you can still have trouble paying your bills Insolvency –The condition that occurs if your liabilities are greater than your assets

Step 4: Evaluate Your Financial Situation You can use a balance sheet to track your financial progress Up-date your balance sheet, or make a new one, every few months Chart changes over time You can increase your net worth by increasing your savings, increasing the value of your investments, reducing your expenses, and/or reducing your debts

Financial Ratios Debt Ratio Liquidity Ratio Debt-Payments Ratio

Debt Ratio Liabilities divided by Net Worth $25,000 / $50,000 = 0.5 Compares your Liabilities to your Net Worth A low Debt Ratio is desirable

Liquidity Ratio Liquid Assets divided by monthly Expenses $10,000 / $4,000 = 2.5 Indicates the number of months you would be able to pay your living expenses in case of a financial emergency The higher the Liquidity Ratio, the better

Debt-Payments Ratio Monthly credit payments divided by take-home/net pay $540 / $3,600 = 0.15 (15%) Indicates how much of a person’s earnings goes to pay debts (excluding a home mortgage) Most financial experts recommend a debt-payment ratio of less than 20%