budgets

							BUDGETS

Learning Objectives:
√ Identify and examine current spending habits
• Identify the various expenses associated with living independently
• Determine the difference between a “need” and a “want”
• Create and maintain a personal budget that supports your personal financial goals
• Understand the relationship between a budget and savings goals


Materials: Students may use an online dictionary or search the web for commonly used financial
terms. The Practical Money Skills web site has a glossary located at:
http://www.practicalmoneyskills.com/glossary


Balance is a skill that is absolutely critical to the game of football. Players must master precise
interplay between their hands and the ball and be able to navigate through and around their
opponents toward the end zone. Balance is just as essential to successfully managing your money.
You need to develop and maintain a balance between where your money comes from and where
your money goes. You can then compare these and see if they are in balance. If you are spending
more money than you are making (through part-time jobs, a stipend or allowance from your parents,
etc.), your budget is out of balance and you will have a difficult time saving money and reaching
your financial goals.

A budget is a financial plan that compiles and compares a person’s income against all of his/her
expenses in order to analyze spending and meet personal goals. It is a tool that empowers
individuals to exercise greater control over their personal finances and make more informed
decisions.

Let’s take a closer look at each of these pieces of a budget.
(Throughout this lesson, bolded or italicized words indicate important vocabulary words.)

Income
Where does your money come from?
The goal is to develop an understanding about where your money comes from and how much
money it is.

Expenses
Where does your money go? You have to answer this question to understand your personal financial
situation. What do you spend your money on and how much do you spend each month? What
patterns do you see in your spending habits and behaviors. Why do you buy the things
you buy? What influences your decision to buy or not to buy?

As teenagers, you will be moving toward independent living. The chart below represents the
main types of expenses in the average adult’s household. (Note: The numbers given represent a
percentage estimate of U.S. household expenses. Averages may vary by country
Typical household expenses
  30%      HOUSING
  18%       TRANSPORTATION
  16%      FOOD
   5%      CLOTHING
   5%      MEDICAL
   5%      RECREATION/ENTERTAINMENT
   5%      UTILITIES
   8%      MISCELLANEOUS
   4%      SAVINGS
   4%      OTHER DEBT



A household cashflow worksheet is another important tool in building a budget. This worksheet
takes budget building to the next level, showing explicitly where monthly income goes every month.
It is typically divided into total income, flexible or variable expenses and fixed expenses.

Monthly Net Income                                   Monthly Variable Expenses
Income #1              $                       Food
Income #2              $                       Entertainment
Interest               $                       Other:
Dividends              $
Total Income:


Monthly Fixed Expenses
Housing          $
Utilities        $                             Total Var Exp:
Transportation   $
Health           $



Total Fixed Exp:

Total Monthly Income:
Total Monthly Expenses:
Total for Savings&Investing:
Needs versus Wants
The most important factor in building a realistic budget is distinguishing between things you need
and things you want. Your needs are all of the monthly expenses associated with the goods and
services that keep your life stable. Wants are goods and services that are not essential to daily living
but are often things that make people happy or may make life seem a little easier or a little more
special. Your expenses can be divided into two types: fixed expenses, which are the same amount
every month, and variable expenses, which often fluctuate throughout the year.
Examples of fixed expenses: rent, car payment, insurance, gym membership, child care
Can you think of more fixed expenses:
___________________________________________________________________________________

Examples of variable expenses: utility bill, groceries, gasoline, phone bill
Can you think of more variable expenses:
___________________________________________________________________________________

When you spend money on something you want versus something you need, this is called
discretionary spending.
Examples of discretionary spending: a soda and snack at a fast food restaurant, movie tickets, a
summer vacation.
Wants and discretionary spending aren’t bad things. In fact, a want can be an excellent motivator for
saving money. However, too much discretionary spending can just as easily be the downfall that
prevents monthly saving. By carefully and constantly monitoring discretionary spending habits, your
opportunities to save become easier to recognize.

Finding the balance
To determine how balanced your budget is, you simply need to add up all your income and subtract
all your expenses. The figure you arrive at is your net gain or loss. If the net amount is positive, this
is a good sign — it means you are living within your income level. It also means you can put EVEN
MORE money into savings. If the net amount is negative, however, that means your monthly
expenses exceed your monthly income; in other words, you’re operating at a loss. You will need to
find ways to trim the expense side of your budget or increase your income (or both); otherwise you’ll
accumulate more and more debt.
Consistency is key to successful budgeting. Just like football players must practice to keep their
skills sharp and their bodies in shape, it’s important not to let your budget get flabby. Reviewing it
each month is the only way to ensure that you are managing your money wisely.


The bigger picture of a budget: Assets, liabilities and net worth
We’ve learned that a balanced budget can help monitor monthly spending and maximize savings. In
the long term, it can also improve one’s overall net worth.
Net worth is your financial wealth at one point in time. The formula to calculate net worth is simple:
Net worth = assets – liabilities
An asset is something that you own that has positive economic value. Growing your assets leads to
a higher net worth.
Examples of an asset: savings account, stocks, antique jewelry, real estate

A liability is something that you owe, something that has negative economic value. Excessive
liabilities can detract from your overall financial picture.
Examples of a liability: home loan, auto loan, and credit cards

Understanding the difference between assets and liabilities. Generally speaking, the key to greater
net worth is maximizing assets while minimizing liabilities.
MODULE 2 // CLUSTER DISCUSSION
Decide whether the following items are an example of a fixed expense, a variable expense or
discretionary spending. In some cases, consider circumstances that may change discretionary
spending into an expense or vice versa.

A magazine and a large coffee

This month’s rent

Dinner at a restaurant

Mobile phone bill

School books

Motorcycle insurance payment

Monthly subway/bus pass

Heating bill

Downloadable songs for an mp3 player

Frozen pizza at the grocery store

A new pair of running shoes

(what if you already have five pairs of suitable running shoes?)

Oil change for the car

A new mobile phone

(what if your old phone stopped working?)

Personal loan payment

A weekly deposit of $15 into your savings account
MODULE 2 // Cluster Exercises
Using the earlier budget percentage chart and the sample household cashflow worksheet,
design a monthly budget for ONE of the following individuals. Read the details of each
individual’s home and work situation carefully for clues on how to allocate their budget
realistically. Think about the person’s discretionary spending and where they are likely to incur
large expenses. Make sure your budget includes plans and/or savings for realistic financial
goals. You will have to make some assumptions based on the information provededBe
prepared to present your budget to the class and defend your decisions.

Cluster __________________________________________
Marissa is a 22-year-old web site designer. Her monthly take-home pay after taxes is $2,000.
She rents a small one-bedroom apartment in San Pablo for $650, utilities included. Her office is
two blocks from her house, and her family lives just eight blocks away. Her dream is to own a
house by the time she’s 30 years old. She is in good health and loves to cook for herself. Her
favorite hobby is shopping for vintage clothing. Louisa believes dressing stylishly is important in
her line of work.

Cluster __________________________________________
Adam is a 28-year-old lab technician. His monthly take-home pay is $3,000. He rents a two-
bedroom house in St. Cloud, Minnesota for $900. His job is an hour’s drive away in downtown
Minneapolis. His least favorite thing about Minnesota is the cold weather, and he tries to
escape as often as he can. He is allergic to just about everything, and when it comes to cooking
skills, boiling water and making toast are all he has mastered. He is a good saver and insists on
putting as much money as he can in the bank.

Cluster __________________________________________
Marco is a 33-year-old social worker. His monthly take-home pay is $2,700. He just bought a
small condo in Mexico City. His mortgage payment is $950, plus he pays a monthly
homeowner’s association fee of $125. He loves his place but is often surprised at the hidden
costs it takes to keep everything in working order. He is in good health, but his two cats are
constantly in and out of the veterinarian’s office. He takes one big international vacation every
year. Otherwise, he lives simply and cooks most of his own meals. He bikes to work and has
never owned a car. He is looking for a girlfriend and has just begun online dating.

Cluster __________________________________________
Abby is a 24-year-old waitress. She shares a small flat in Moscow. Her share of the rent is $500,
and utilities cost her about $65. Her monthly paycheck is only $900, but she usually makes an
additional $700 per month in tips. Abby also earns about $100 a month helping a friend stage
art installations. Abby’s roommate is a slob, so she wants her own place very badly. She likes to
cook and would do it more if she ever came home to a clean kitchen. She is in excellent health
but does spend $45 every weekend going out to the country to visit her ailing mother.
Thankfully, the restaurant where she works is only three subway stops away. She eats lots of
her meals at the restaurant, for free. Her dream is to one day go back to college and finish her
art degree.
Cluster __________________________________________
Carol is a 21-year-old part-time graduate student in Chicago. She works at a law office as a
paralegal while she attends law school at night. Her monthly paycheck is about $2100. She
currently lives with 3 other girls but has to share a bedroom. Her share of the rent and utilities
is $300. Although she can walk to work she has to drive 45 minutes to school at night. She has
very little time to cook so eats mostly at diners and fast food places. Her apartment is too noisy
to study so she spends most of her time at the nearby library. She has taken out loans to pay
for law school but will need to repay them starting in 2 years when she graduates.