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Budgeting Powered By Docstoc
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.;
Students should also be able to
• 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
• 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 Identification
•   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
•   Things we must have to survive such as
•   Water
•   Food
•   Clothing
•   Shelter
•   Transportation
•   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)
• Education – the more you have, the more
• 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
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
• Other
Planning the Use of Income
• Fixed/committed expenses
• Variable living expenses
• Savings and investments

• Spend based on the valleys of your
  income and save or invest the
• Take out your notes and I will project the
  statements on the screen. You will need to fill in
  the blanks as always, without any words of
  elaboration from me.

• Thank you!

• Monday!
• If I talk, I won’t get better

• I can whisper in the mean time.
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.
• 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
    Unexpected Expenses Q1 - 2005
•   Son #1 – Broken nose, $500 after insurance
•   Son #2 – Mono & penicillin allergy $150
•             car broke down, got towed/fixed $230
•   In-laws – Hurricane Wilma evacuation $500
•   Mother – respiratory failure make last visit $500
•   Wife’s - care broke down, got towed/fixed $613
•            crown for a tooth $600
•   Me – Tooth implant $2,500, Glasses $250.
•   Total - $5843
• 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
• What effect does a deduction have on your
  paycheck? Are deductions good?
• Deductions make your paycheck
    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       106.00
•   State Income Tax          24.00
•   Social Security           49.60
•   Medicare                  11.30
             »Total Taxes              $ 191.20
             »Net Income               $ 608.80
             »Taxes are approximately what %?
  Are there other taxes?
• The tax rate for most items in Champaign is
  based on the following charges:
• State              5.00%
• City-Statutory     1.25%
• City-Home Rule 1.00%
• County              .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
More Managing Resources
•   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
• 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
• 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?
• What can help you deal with the high cost
  of unexpected expenses?
• 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
  NO!! Explain!
• When you make a loan payment, the
  amount of your liabilities
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
  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.

Investments       300

• 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
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
• 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
• 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
•   If you budget wisely
•   keep good tax records and
•   record your income accurately
•   you shouldn’t have to worry about
 You have been selected
       to have your
         tax return
     investigated by

   the   IRS

• You should have three sets of notes on
• Take one page of notes from them for you to
  use on the test
• Make sure you can answer the Goals and
• You need to turn both sets of notes in along
  with your test, the study guide and the activities
• When preparing your notes, it would
  probably be a good idea to make sure
  you write down something about the goals
  that are identified at the beginning of
  Chapters 14 and 42 along with the goals
  at the top of the first page of the first hand

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