Mastering Budgeting and Financial Planning

2. Learning Intentions At the end of this unit I will: • Be able to budget • Understand income and expenditure for an individual or a household • Understand and evaluate a surplus and a deficit • Value financial planning and budgeting

3. 3 3 3

4. BEFORE WE BEGIN #04AFEF Do this exercise individually or in pairs. Tick whether you agree or disagree with the statements. Revisit it after the unit to see if you have changed your mind about any of them.

5. ‘3Ts’ = Turn, Think, Talk • What is a budget? • Why should you prepare a budget? Wonderful Worthwhile Websites www.makingcents.ie www.consumerhelp.ie www.mabs.ie www.mymoneysense.comwww.bankofireland.com www.aib.ie/i-am/budgeting-for-my-family

6. What Is A Budget? A budget is a plan (estimate) of income and expenses for a period of time. • Budgets are important for individuals, families, businesses and governments • A budget will help you to monitor and control spending • Budgets help you to: • Make decisions • Be prepared

7. Why Budget? A budget will help you to: • Be aware of your income and expenditure • Live within your means Discretionary spending for an individual is spending on things that they want to buy rather than on things they need. Budgeting is knowledge. A budget highlights when: • You will have a lot of expenditure • When to delay discretionary spending so you can pay essential bills

8. Example 1: Hugh’s Budget Hugh, a sixth-year student, has decided to prepare a personal budget for January. He has over-spent on Christmas gifts and is short of money. • Read the details of Hugh’s budget on page 153 of the textbook. • Study how the budget information is presented in the table. • Answer the Checking In questions on page 154.

9. Creating a Household Budget When preparing a budget, there are five steps to work out: Step 1. Planned income Step 2. Planned expenditure Step 3. Net cash Step 4. Opening cash Step 5. Closing cash

10. Step 1: Planned Income The first step in preparing a budget is to determine income. • Regular income • Received every week or every month Total planned income = regular + irregular income • Examples: salary, student grant, pension, jobseekers’ benefits • Irregular income • Only received now and then • Examples: bonus, overtime, Bingo, GAA lottery, Prize Bond win

11. Example 2: Smiths’ Planned Income

12. WORKING WITH OTHERS #04AFEF Copy and complete the following table to show your understanding of income. Page 155

13. Step 2: Planned Expenditure The second step in preparing a budget is to determine your expenditure. • Fixed expenditure – predictable every week or month • Irregular expenditure – varies with usage, such as electricity bill Total expenditure = fixed expenditure + irregular expenditure + discretionary expenditure • Discretionary expenditure – for items such as holidays

14. Example 3: Smiths’ Fixed Expenditure

15. Example 4: Smiths’ Irregular Expenditure

16. Example 5: Smiths’ Discretionary Expenditure

17. Example 6: Smiths’ Total Planned Expenditure Total expenditure = fixed + regular + discretionary

18. Step 3: Net Cash Net cash is the money you have left at the end of a period of time. It is the difference between your total planned income and your total planned expenditure. Look at the example on page 159 of your text book and you will see that in January the Smiths’ have: Total Planned Income €2,950 Total Planned Expenditure €2,770 By subtracting one from the other, they find they have planned to have €180 left over at the end of January.

19. Step 3: Net Cash Net cash = total planned income – total planned expenditure.

20. Step 4: Opening Cash Opening cash = the money that you expect to have at the beginning of the month.

21. Step 5: Closing Cash Closing cash = net cash + opening cash

22. Note: Opening Cash Remember: The opening cash figure in the Total column is always the same as the opening cash figure in the first month of the budget.

23. Example 6: Smiths’ Budget for Three Months The Smiths’ household total budget for three months is shown on page 161 of the textbook. • Review how the budget information is presented in the table. • Compare the Total Planned Income and the Total Planned Expenditure.

24. CHECKING IN Using the Smiths’ budget as an example, create a household budget for the Browne family using the information on page162.

25. Summary: Creating a Budget • 1 • Draft a list of your planned income. 2 • Draft a list of your planned expenditure. 3 • Subtract total expenditure from total income to calculate net cash. 4 • Add opening cash to net cash to calculate closing cash. 5 • The closing cash of the first month becomes the opening cash of the second month, and so on. 6 • The opening cash in the first month will also be the opening cash in the Total column.

26. 1.12 BUDGETING • What type of expenditure varies with usage? Quick Quiz Fixed expenditure Irregular expenditure Discretionary expenditure

27. 1.12 BUDGETING • What type of expenditure varies with usage? Quick Quiz Fixed expenditure Irregular expenditure Discretionary expenditure

28. 1.12 BUDGETING • What type of expenditure varies with usage? Quick Quiz Fixed expenditure Irregular expenditure Discretionary expenditure

29. 1.12 BUDGETING • What type of expenditure varies with usage? Quick Quiz Fixed expenditure Irregular expenditure Discretionary expenditure

30. 1.12 BUDGETING • Fixed expenditure is predictable every week or every month (e.g. rent, bus fares). Quick Quiz: Review • Irregular expenditure varies with usage (e.g. electricity bill). z • Discretionary expenditure is for items such as holidays or gifts.

31. Analysing the Budget A budget has to be analysed, changed, improved and revised on a regular basis because income and/or expenses may change. When analysing a budget you either have: • Budget deficit • Budget surplus

32. Budget Deficit What can you do if your budget highlights a deficit? 1. Take on extra work 2. Raise additional income 3. Arrange to pay off bills in instalments 4. Shop around for cheaper alternatives to your current suppliers 5. Reduce certain bills and leave out discretionary spending as it is not a necessity 6. Make gifts instead of buying them 7. Borrow more money (in extreme circumstances only)

33. WORKING WITH OTHERS #04AFEF In pairs: 1. Research tips on how to escape money troubles. 2. Create a poster/presentation on the ‘Top Ten Tips for Managing Finance’. 3. Ensure that your research is accurate and name your sources. Page 163

34. Budget Surplus If your budget identifies months with a potential surplus, what might you do? 1. Buy necessities that you had done without previously. 2. Invest your surplus to make more money. If you have a budget surplus, be prudent. Don’t blow it! 3. Save the surplus for a rain day.

35. Revised Budget Sometimes it is necessary to revisit a budget because your circumstances change. For example: • Your employer cuts your wages • You get a pay increase

36. Revised Budget Negative Changes Positive Changes • Decrease in wages • Increase in wages • Income taxation could increase PAYE, PRSI or USCŸ • A bonus or extra commission/overtime might be received • There may be an increase in expenditure on insurance, food, etc. • Gift or inheritance • Income taxation could decrease • Decrease in expenditure on insurance, food, etc. • Decrease in expenditure on insurance, food, etc. • Increase in interest on a loan, overdraft or mortgage • Decrease in interest on a loan, overdraft or mortgage

37. WORKING WITH OTHERS #04AFEF In pairs, work your way through the information given on page 165 about the changes in the Smiths’ Budget. Work your way through the revised budget on page 166. Page 165-6

38. CHECKING IN • In pairs, complete the difference column for the Ryan Household Budget Comparison Statement on page 168. • Then view the Carter Budget that shows Budgeted, Actual and Difference on page 169. You are required, from your knowledge of budgeting, to suggest a reason for any difference that has occurred.

39. Example 7: Comparison Statement Good practice to compare the budget with what actually happened.

40. Budget for Households

41. Presenting Data Graphically • Bar Chart • Shows the relative sizes of things

42. Presenting Data Graphically • Line Graph • Shows how things change over time

43. Presenting Data Graphically • Pie Chart • Shows percentages of a whole

44. Presenting Data Graphically Success criteria: • Title (label) • Draw to scale • Label the axes for bar charts and line graphs • Label the individual sections of pie and bar charts or use a ‘key’

45. 1.12 45 45 45

46. Budget • Irregular income • Budget deficit • Net cash • Budget surplus • Opening cash • Closing cash • Regular income • Discretionary expenditure • Excel • Expenditure • Fixed expenditure