1. Planning a Budget
Chapter 28
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2. What happens if we spend more than we earn?
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3. 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?
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4. 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.
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5. 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!
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6. Step One: Estimate Income
Where to start?
Step One: Estimate Income
How much money will you likely receive next month?
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7. 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.
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8. 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?
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9. Social Security Tax (6.2%) Medicare Tax (1.45%)
Federal Income Tax (approx. 15%)
State Income Tax (approx. 3%)
Health Insurance
Retirement
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10. 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 $ a week
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11. 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: %
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12. Net Pay – your take-home pay. Gross pay minus deductions.
$ $79.60 = $320.40
Amount used in budget
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13. When on your own, what will you need to spend your money on?
Housing
Transportation
Food
Clothing
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14. 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
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15. Variable expenses – expenses that fluctuate or change from month to month.
Food
Clothing
Entertainment
Recreation
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16. 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
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17. A budget isn’t complete without a regular plan for savings.
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18. 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.
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19. 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!
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20. Personal Savings Rate Declining
1974 to 1984
10%
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 As of January, the personal savings rate was minus 0.7 percent.
Americans not only spent all of their after-tax income in 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
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21. 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.
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22. 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
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23. Invest $200 per month for 50 years in an aggressive growth fund earning on average 10% per year:
$3,464,878.16
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24. Budget Variance – the difference between how much you planned to spend and how much you actually spent.
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25. 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
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26. Chapter 28 Bookwork Fast Review (page 460) #’s 1-5
Using Business Key Words (page 466) #’s 1-11.
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