Budgeting

Budgeting ISBE ISBE Objectives •After studying this unit, students should be able to: •Understand that a budget is a plan for spending income; •Demonstrate how values, goals and needs influence the use of personal and family income; •Identify and set priorities for personal and family needs, wants and goals; •Recognize the different kinds of resources used by individuals and families; •Use the principles of money management in financial planning; •Understand that at different periods in life, financial plans change •Become familiar with the function and uses of a budget; •Recognize that income must be allocated; •Understand the value of using resource effectively; •Recognize that product cared and maintenance protect future resources. * What is a budget? •A budget is a plan to achieve financial goals by matching needs to resources by helping you control the flow of your money. •Money flowing in is your income. •Money flowing out includes your Savings and Investments Spending and Credit + Taxes Budgeting will help you: Develop a better understanding of your financial status, your net worth; •Use your income rationally by buying what you really need and want; •Examine and reach your goals, values, needs and wants logically; •Get maximum value for expenditures; •Develop an awareness of alternatives; •Live within your income or get our of debt; •Develop useful records for tax purposes; * •Become independent. Budgetary Influences •Values and Goals • Definition and Identify goals • Know how values affect financial decisions • Establishing a personal financial plan through goal selection • The first decision is how to save for future expenses (PYF) •We need to identify and define what is\ important to us •What we value affects our financial decisions. it’s important to some to look good –Wear good clothes –Drive a car that fits their image •Others have different, long range priorities Needs •Things we must have to survive such as •Water •Food •Clothing •Shelter •Transportation Wants •Things we want to have such as •Bottled water •Steak, crab, lobster •Designer Clothing •Luxury car Scarcity & Alternative Choices •Items that are scarce are more valuable thanks to the Law of Supply and Demand. •There are usually alternative choices to expensive items •Tap vs Aquifina •Lumina vs Lexus •Rib eye vs filet Life Cycle Variations •We need to budget differently and for different things during different life stages. •Student - spartan •Working single – more $ lower costs •Newly married (DINKs) •Young family – same $ more expenses •Growing family – dependent kids (same $ still more expenses) •Mature family- (heaven) most $ low costs •Retirement – happy trails (less money, highest medical expenses) Resources •Education – the more you have, the more income •Skills – carpenter, mechanic, electrician •Unions – arrange for work for some •Time – use wisely, determine when credit card payments are due •Income – what we use as the basis for our budget Planning a Budget •Establish Goals •Long Range •Medium Range •Short Range Short Range Financial Goals •Food •Clothing •Rent •Entertainment •Computer Medium Range Financial Goals •Money for basic transportation •Money for college •College scholarship Long Range Financial Goals •Car •House •Business •Retirement Establish Resources (Income) •Allowance •Salaries / Wages – (weekly, bi-weekly, monthly) •Gifts •Commissions •Tips •Interest and dividends (stock profits paid to shareholders) •Other Planning the Use of Income (Expenditures) •Fixed/committed expenses •Variable living expenses •Savings and investments •Spend based on the valleys of your income and save or invest the peaks What are fixed expenses? •Fixed expenses remain the same every time they need to be paid. •Examples? •Car payment •Rent •Mortgage payment •Cable/Satellite •Internet •Insurance What are Variable Expenses? •Variable expenses are payments that vary and are due at irregular times. Examples? •Electric Bills – High in summer due to A/C •Gas – High in the winter due to heating •Water & Septic – High in summer (watering) •Trash – Trending towards based on amount •Unexpected expenses Controlling Utilities •Set your thermostat to 80 in the summer •Turn everything off when finished •Set your thermostat to 60 in the winter •Call wisely •Do you need to pay for all unexpected expenses from your savings? • NO!! •What can help you deal with the high cost of unexpected expenses? •Insurance Types of Pay •What you make, or the total of your paycheck is called your gross pay. •What’s gross is the number and amount of deductions that are taken out of your paycheck. •What effect does a deduction have on your paycheck? Are deductions good? •Deductions make your paycheck smaller Take Home Pay •Also known as Net Pay or gross pay minus •Federal Income Tax •State Income Tax •Social Security •Medicare Pay is REALLY Gross minus •Local taxes •Deduction for Retirement •Health Insurance •Union Dues Gross Example of Net Pay •40 hours @ $10/hour = Gross Pay = $800.00 • Minus taxes •Federal Income Tax •State Income Tax •Social Security •Medicare »Total Taxes »Net Income »Taxes are approximately what %? 25% Are there other taxes? 106.00 24.00 49.60 11.30 $ 191.20 $ 608.80 •The tax rate for most items in Champaign is based on the following charges: •State •City-Statutory •City-Home Rule •County • 5.00% 1.25% 1.00% .50% 7.75% •The tax on groceries, drugs and medical appliances is only 1%. •Food and beverages sold for immediate consumption are taxed at the rate of 8.25% Net Worth •The difference between the items of value a person has and the amount owed to others is their net worth. •A more formal way of saying that is, “the difference between a person’s or family’s assets and liabilities is their net worth.” •How would you put that into a formula? •Assets – liabilities = Net worth Assets – Things You Own •Income •Bank Accounts •Investments •Real Estate Equity •Personal Property (cars) •Life Insurance Cash Value •Retirement Accounts Liabilities – Amounts You Owe •Outstanding Bills •Credit Card Debt •Student Loans •Installment Loans •Mortgage •Home Equity Loans •Taxes Due Preparing and Evaluating Budgets •Involve the entire family •Be realistic in allocating expenses •Keep written records of income & expenditures •Keep money management simple and flexible •Excesses or shortages require reallocating or shifting funds Factors Signaling Budget Revision •Continuous discrepancies •Change in income (promotion / raise) •Change in needs, goals or life style •Change in life cycle •Change in economic environment (war, inflation, recession, disasters, etc.) Manage Your Resources •Alternatives to buying goods and services –Rent –Trade or Barter –Repair or make yourself –Buy used –Do without •Be aware of and manage your time •Maintain health and personal energy •Care for and maintain what you own •Reduce, reuse and recycle Financial Counseling Sources •Banks, savings and loans, credit unions •Family financial and credit counseling •Family service agencies •Bankruptcy (Chapter 13 – Individual Debt Adjustment Bankruptcy enables debtors, to repay in full or partially through installments under supervision by the courts. Must not exceed 5 yrs. And be approved if more than 3. •The money you receive from the work you do and money that you invest is called income. Financial Management •The primary tool for making economic decisions is the budget. •Part of the process of making decisions is money management. •The first money management decision you need to make is how to pay for basic needs (food, clothing, shelter, etc.). •The second money management decision you need to make is how to save for future expenses (car, college, etc.). •The third money management decision you need to make is how to spend discretionary income. •Savings should be considered a monthly expense. •Your first savings goal should be an emergency fund. •The balance in your savings account is an asset. •Money you have that is available after you have taken care of your basic needs and future expenses is called discretionary income. It is spent on your pleasure, satisfaction, comfort; such as for entertainment, travel, CDs, hobbies, etc. •The easiest expenses to budget for are fixed expenses. •Your expenses fall under the category of liabilities. •What happens to the cost of children as they become older? They become more expensive. •Do you need to pay for all unexpected expenses from your savings? NO!! •What can help you deal with the high cost of unexpected expenses? Insurance •Is it necessary to keep a record of your payments once bills have been paid? YES!!! in case there is a record keeping error on the part of the company or person you paid. •Is borrowing always a sign of poor money management? NO!! Explain! •When you make a loan payment, the amount of your liabilities increases. Record Keeping Documents •Two common financial documents used in money management are the balance sheet and the cash flow statement. •A financial document which reports what a person or family owns or owes is a Personal Balance Sheet which consists of what you own or assets, what you owe or liabilities and the difference between assets and liabilities which is net worth or owner’s equity. •A Balance Sheet is helpful in measuring financial strength. •The form that reports net wages and other income alone with spending for a period of time (usually a month) is called a Cash Flow Statement. •When preparing a cash flow statement, you should first record your net income. The final step is to subtract your total expenditures from your total income. •If you spent less than you had in income on a Cash Flow Statement, the different represents an increase in your net worth or owner’s equity which represents the amount of money that could be claimed if all assets were sold for cash and all debts were paid off. •Add the $420 to the assets on the Personal Balance Sheet ie., $120 to savings and $ 300 to investments. •Business use similar financial tools. •The financial plans of a business are identified in their budget which can be compared to a road map because it identifies the business’s progress toward its financial destination. •In a business, the budgeting goals are much the same as in a household – to determine what the sources of income are and how they will be distributed. Financial Statements •Businesses use reports that summarize the financial performance of a business just like families do. These reports are called financial statements and are the balance sheet and the income statement. •If you own your own small business, the money you receive is called revenue. If expenses are greater than revenues, the result is a net loss. •A business’s assets and liabilities are listed on its balance sheet. In a business, the buildings and equipment owned by a business are its assets. •A businesses revenues, expenses, net income or loss are reported on their income statement, much like a family’s is reported on their cash flow statement. When revenues are greater than expenses a net profit occurs. •Financial record keeping has been made much more efficient and accurate since the beginning of the age of computers. •If you budget wisely •keep good tax records and •record your income accurately •you shouldn’t have to worry about Congratulations! You have been selected to have your tax return investigated by the IRS.