Budgeting “Pay Yourself First”

Personal Budget Working Tool Take Control Directs flow of cash received towards financial goals Must be Flexible! Takes discipline

? 2-A-1 NEFE High School Financial Planning Program Unit Two – Budgeting: Making the Most of Your Money ? 2-A-1

2-A-2 NEFE High School Financial Planning Program Unit Two – Budgeting: Making the Most of Your Money 2-A-2

Reasons for a Spending Plan …Helps you determine where you are spending your money currently. …Helps you decide where to spend your money in the future. …You have an organized way to save for things that cost more. …Puts you in control of your financial future, beginning NOW. …You will always know what you have to spend. When you take the time to create a budget have a clear understanding of just how much money they actually have to spend. With that information they then know their limits. …You know where you want to spend your money and how much you want to spend in any one area. When you take the time to analyze how you spend your money you will quickly find out where it all goes. In that process, you may find yourself spending lots more on some things than you actually intended, leaving you much less money for other things you want. A budget lets you decide just how much of your available money you want to spend in each area of your life. …You have an organized way (“Pay Yourself First”) to save for things that cost more than what you have at any one time. The most important part of a budget is that it gives you a structured way of saving for things that cost more than what you might ordinarily have at any one time. By saving – and by waiting until you have the money to buy something expensive – you can pay cash for what you want without borrowing and going into debt (and paying lots more in interest charges!) 2-B-1 1 2 3

People Without a Budget… …Are less likely to know what they have. …Have no plan, often coming up short before their next paycheck or allowance. …Are almost certain to have no plan to save for more expensive spending goals. …Are less likely to know what they have People without a plan are rarely organized enough to stay focused on just how much they have to spend at any one point. …Have no plan for spending what they have, often coming up short of money before their next paycheck or allowance. Even if they know how much they are earning, people without a budget have no structured way of spending what they’re bringing in. That often leads to an empty wallet long before the next paycheck or allowance. …Are almost certain to have no plan to save for more expensive spending goals. When you don’t necessarily know what you’re making, and you have far less of an idea of where you’re spending your money, you’re also very unlikely to have any real saving plan for buying those things that cost a lot of money. Lacking any of these, the temptation to borrow money to get ‘big ticket’ items is great. As you’ll learn later, borrowing costs money that you will pay to whoever is loaning you the money. Bottom line? A big ticket item that is paid for with credit (rather than saved for over time) will cost you many more hard-earned dollars, leaving fewer dollars for you to spend on things that would directly benefit you. 2-B-2 1 2 3

S A V E PAY YOUR$ELF FIRST! etting aside money for “big ticket items” voids borrowing, which costs you a lot! It’s a V ery wise thing to do, because E very time you pay yourself first, you are developing a saving habit that leaves you with more money to spend later on for things that are really important to you!

2 Parts of Budgeting 1. Income: Money Received from any source (limited source) 2. Expenses: Money spent to satisfy needs/wants

GROSS VS NET Gross pay is the total amount you earn before any deductions are subtracted. $6.50 X40=$260.00 Net pay is the amount you “take home” after deductions. Overtime is time worked beyond the regular hours A standard workday is 8 continuous hours with scheduled breaks plus an unpaid lunch period. A standard work week is 40 hours in a 5 day period of time.

OVERTIME Fair Labor Standards Act states that: “employers must pay hourly workers for overtime at the rate of 1 1/2 times the regular rate of pay.” So… if regular pay is $6.50- then overtime would be $9.75. 40 hours x $6.50 = $260.00 5 hours X $9.75 = $48.75 Gross pay = $308.75

Paycheck Stub Salaried employees do not receive additional pay for overtime work. Their gross pay is the same month after month. The employer divides the salary into equal amounts for each pay period. Under the “YTD” heading, your gross pay is added up throughout the year.

Income- Payroll Deductions Money subtracted from Gross Income: Union Dues Health Insurance Savings plans Taxes Taxes are the largest deductions-required by law

4 Payroll Taxes 1. Federal Income Tax 2. State Income Tax 3. Social Security Tax (FICA) 4. Medicare Tax (FICA) FICA- Federal Insurance Contribution Act Employees match contributions

Example: Employee: Pat Doe Gross income: $240 SSN: 000-00-0000 Deductions: State Income Tax $8.60 Federal Income Tax $21.00 FICA $14.88 Medicare Tax $3.48 Total Deductions $47.96 Net Income $192.04

W-4 Form Withholding Allowance Certificate

NET PAY When all deductions are taken out of your gross pay, the amount left is your net pay. Net pay is the amount of money you can actually spend. Net pay is often called “take-home pay” because it is the amount you can actually use as you wish Regular wages or salary + Overtime= Gross Pay Gross Pay - Deductions = Net Pay

W-2

Federal W-2 Wage & Tax Statement Employees receive at beginning of year Itemizes money earned & withheld by IRS Based on previous year income Employee can determine if paid too much/ too little to IRS Tax refund- too much Taxes owed- too little

IRS Internal Revenue Service Responsible for collecting taxes

Tax Information Single tax payers who earn less than $8,500 do not have to file a tax return

2nd part of Budgeting: Expenses! Money spent to satisfy needs/wants Working Budget: Expenses & income balance Expenses should not exceed income Limited resources- choices on how to spend money Opportunity costs vs. delayed gratification

Expenses included in Budget Fixed: Savings- PYF (Leftover approach never works) Example: Car payment Insurance Same amount of payment each time Variable: Examples: Gas, Food, Entertainment costs, clothing Can change month to month

How to Build a Budget Decide on a time frame for tracking expenses (week, two weeks, month). List all money you have coming in (income). Make categories for all expenses. Subtract total expenses from income. Study your budget and your financial plan to make sure it fits with your plans and goals. 2-F 1 2 3 4 5