Money Management 1: Budgeting and Goal Setting for Financial Freedom

1. Money Management 1 Participant’s Guide

2. Table of Contents • Welcome • Pre-Test • Budgeting Process • Needs and Wants • Types of Expenses • Organizing Data • Budgeting for Periodic Expenses • Goal Setting • Establishing Priorities • Tracking Expenses and other Data Collection • Post-Test • Glossary

3. Welcome Welcome to the Money Management 1 module! The most important thing to do with your money is to give it a plan. A budget. A spending plan. A cash-flow plan. Call it what you will, but having a plan for how you spend money will set you free to actually enjoy it. Objectives After completing this module, you will be able to: • Understand why budgeting is a key element of financial freedom • Understand how to track your spending and why it’s important to do so • Set S.M.A.R.T. goals • Take steps to create a budget Participant Materials This Money Management Participant Guide contains: • Information to help you learn the material • Tools and instructions to create goals • A glossary of the terms used in this module

4. Pre-TestTest your knowledge about financial management • Following a spending plan helps you: • Meet expenses in a given period of time • Control your financial situation • Build assets • All of the above • In order to track your daily spending habits, you should: • Find ways to increase income • Write down what you buy or pay for each day • Find ways to decrease spending • Determine your monthly income and expenses 3. Which of the following are examples of a variable expense? Select all that apply. • Car payment • Health insurance premium • Electric/water • Personal expenses 4. Which of the following are ways you can save more? Select all that apply. • Pay yourself first • Use coupons • Develop a spending plan • Use your credit card rather than paying with cash/debit card • After you identify and write down your financial goals, the second step to setting financial goals would be to: • Evaluate and change them as necessary • Select two to three main goals • Organize them • Learn more about implementing these goals

5. Why Bother to Budget? Our current economic crisis clearly demonstrates the need to have our own financial houses in order, but many have not taken the steps to ensure their own financial sutures. Did you know? • 61% of U.S. households don't have a budget. • Over 11 million adults don’t monitor their overall spending and don’t know how much they spend on food, housing and entertainment. • 24% of U.S. households admit to not paying all of their bills on time. • 1 in 3 adults (34%) carry credit card debt from month-to-month. 15% or 35 million people carry more than $2,500 of credit card debt. • 32% have no retirement savings, and 34% have no emergency savings. Taking control of our money is essential for financial freedom. So how do we do that? Source: April 2014Consumer Financial Literacy Survey by Harris Interactive, Inc A spending plan or budget merely allows us to proactively determine the direction of our money. We designate how money will be spent in advance of receiving it. Having a written plan will allow you to gain greater control over your money; and in working the plan, you will find ways you can redirect money to help you achieve your goals. No spending plan is complete unless you have addressed past, present and future needs. Your spending plan will include: • Funds to pay off debts • Funds to provide for current needs such as: • Housing • Transportation • Food • Shelter • Medical • Funds to provide for future needs such as: • Emergency Savings • Goal Savings • Retirement Savings A spending plan provides for needs first and then wants.

6. Budgeting Process Budgeting is a process. Your first budget is likely going to be adjusted as you test it over time. Data Collection: Over the last couple of months, we have been gathering data to use in developing a solid spending plan. Your spending tracker as well as data from other sources will help you paint a picture of where your money currently goes. Organize Data: Once you have data collected, you will organize this data into budget categories. You don’t want too many categories or the budget becomes difficult to manage, but you do want enough categories that all the expenses are accounted for. Periodic and Goal Spending: Now you are taking your budget from a backward looking accounting of expenses to giving your budget direction for the future. Break your periodic expenses and goals into monthly amounts to be saved and add them to your budget categories. As you include these expenses, you will begin to save for future anticipated goals. Periodic spending and goals also help us to think about monthly spending choices in a new way. Build your budget: With all the data, you should be able to construct a budget. Just take your organized category spending and add in the periodic and the goal spending to create your basic budget. Evaluate and Adjust the Plan: If your spending each month adds up to more than your income, you need an adjustment. We will talk about adjusting your budget in our next session.

7. Budgeting • Some people call it a budget; some call it a spending plan; some call it a map to spending. No matter what you call it, a budget is nothing more than a written plan for spending; and a written plan is necessary because it allows you to see the big picture in your financial situation. The big picture will move you from a paycheck-to-paycheck cycle and allow you to understand the importance of tracking cash flow, setting aside money for ongoing and anticipated expenses and maintaining an emergency fund. • The first step to taking control of our money is to track our spending. Most of us can easily recognize our big expenditures ~ rent/mortgage, grocery bills, etc. ~ but it’s the little things, the coffees and candy bars, that often throw us into a tailspin. • Start tracking where your money goes. It’s important to track everything. If you toss a dime into a fountain, write it down. If you grab a soda from the machine, write it down. Bills, regular expenses, write it all down. Your goal is to see where you’re actually spending. • Track your spending for at least two weeks (preferably for a month)and then evaluate your spending. Do you see any patterns? Where are your weaknesses? What needs to be controlled? This is the information you’ll need when creating your budget. • Overcome Temptations: Review your temptations list and consider how you might control your spending in the areas where you are tempted. Often, we need to take a pro-active measure to avoid temptation. For example, if you are planning to cut back on eating out, you may need to take some extra effort to plan meals to fit in your routine. • Identify Priorities: You need to determine which are controllable expenses and which are not controllable expenses. For example, your rent or mortgage is not controllable. Sure, you may be able to refinance or move to a less expensive apartment; but for right this minute, it is what it is. This worksheet will be part of your homework for the next class and is found on page 35 of your Passport. This is also the step where you’ll create your S.M.A.R.T. goals. Remember, change is always easier when you know what you’re working toward. • Determine Wants vs. Needs: Needs are essential and must be funded. Wants can be funded with any discretionary money left after all other priorities are funded.

8. Separating Wants and Needs Separating Wants and Needs Sometimes it’s hard for us to tell the difference between wants and needs. We are bombarded daily with messages that tell us we simply must have a certain product or do a certain thing to be happy. Spending all our money on wants is a key reason many of us fail to achieve financial freedom. Knowing the difference between your wants and needs will help you be successful. Life is meant to be lived, not survived. Treat yourself to some wants along the way, but do so when you can afford them. Enjoy those wants as the extras that they are.

9. Expense Types Fixed expenses are easy to budget for because they are the same each month.  The budgeted amount for fixed expenses is whatever the cost for that item is. Variable expenses happen every month, but the cost fluctuates (groceries, entertainment, doctors, etc.).  They are harder to budget for because the amount can change from month to month.  To create a budget for variable expenses, you will want to look at some prior months and take an average of the expenses.                  Example:  Food Costs                 Month 1:  $178 Month 2:  $256 Month 3:  $204 = Average cost:  $212.67 In the months where you spend less, you can put away the extra money to help you meet your needs during the more expensive months.  In this example, in Month 2 you would have to borrow from savings or from another budget category to supply the need because you haven’t built up a savings reserve yet for the months when you are short.  Month one would have helped some because you would have set aside $34.67 but that wouldn’t be enough to fund Month 2.  You would have to readjust spending somewhere else. Periodic Expenses (commonly known as budget busters) happen occasionally and can be expensive: • Vacation • Back to School • Weddings • Birthdays • Holidays • Tuition • Insurance • Property Tax • Income Tax • Car Maintenance • Clothing • Home Repairs Planning for these requires a little extra homework.  Getting a good estimate of the cost for the item is key.  For fun items like Vacation and Holiday spending, getting the entire family involved in saving for the event can be an opportunity to teach children about financial planning and the importance of savings. To budget for these items: • Determine the timeframe of how often the expense occurs (annually, quarterly, twice per year, etc.). • Figure out the total amount needed to cover the expense. • Divide the estimated cost by the number of months you have to save. This will give your monthly cost. For example, if your expense is annual, the take the estimated cost and divide by 12.  That is how much you need to save each month (assuming that your expense is a full year away).  For quarterly expenses, divide the estimated expense by 3 so that you can save each month and have the full amount by the end of the quarter.  See page 26 of your Passport for a periodic expenses planner.

10. Organizing Your Data Now that you’ve learned about different types of expenses, you will now learn to categorize them. When you group your spending together, it actually makes budgeting more simple. This month, you will be grouping your spending that you have tracked and continue to track spending by category. Use the worksheet on page 25 of your Passport to organize your spending into categories. You want to have simple major categories for spending, but enough categories that all your regular expenses are captured: You determine how many categories you need for your budget. Look at the categories listed in the spending plan on page 24 of your Passport for an example that you might want to apply to your first budget. Unfortunately, some transactions may be a little harder to organize into categories than others. These tricky transactions are where multiple categories are covered in the same purchase. In the example above, the X-Mart purchase included groceries (or food), clothing and miscellaneous. NOTE: If you operate a small business, keeping track of the business related expenses is vital for accounting at tax time. The more expenses you track, the less tax you will end up paying in the end. You must have a written record of all business expenses.

11. Organizing Spending by Category • In order to categorize expenses, it is important to consider what types of expenses should be included in each category. • Housing - includes rent/mortgage, utilities, maintenance and telephone expenses • Groceries - includes costs of food prepared at home, eating out included in entertainment • Auto - includes costs of loan payments, insurance, maintenance and repair (can include costs of mass transit and rides) • Debt - includes consumer debts like credit cards and personal loans (not mortgages) • Entertainment - includes eating out, movies, events, internet and cable • Clothing - includes accessories, undergarments, coats and everyday wear • Savings - includes emergency fund and savings for periodic expenses • Medical - includes medical insurance, co-pays, pharmacy, dental and vision • Miscellaneous - includes gifts, allowances, subscriptions, postage, personal care, etc. • Investments - includes long term savings for retirement, etc. • Education - includes costs of books, tuition and supplies for both adults and children (also includes student loans) • Charitable - includes church, workplace giving, support of nonprofit and political organizations • Insurance – includes life and disability coverage

12. Budgeting for Periodic As mentioned earlier, not every expense happens every month. So how do we plan for periodic expenses ahead of time? Identify cost and timeframe for your goal: What is the total cost for your goal and how long do you have to complete this goal? EXAMPLE #1: I have to pay personal property taxes in June each year. Estimated cost $360. Calculate monthly cost: $360 ÷ 12 months = $30 per month EXAMPLE #2: I have to pay $180 quarterly for auto insurance. Calculate monthly cost: $180 ÷ 3 months = $60 per month Without a plan for periodic expenses, you will find yourself either depleting other savings or incurring additional debt just to cover expenses. Just because they don’t happen every month doesn’t mean they are not important. Regular periodic expenses are easier to plan for because you know when and about how much those expenses will be. Irregular periodic expenses may require more research. For example, how much should you plan for maintenance and repairs on your car? You may be able to rely on historical averages or you might choose to do an internet search to find out average costs for your make and model. No matter how you choose to estimate, it is important to plan for these expenses so they don’t catch you unaware. The goal is to set aside regular savings each month to cover periodic expenses. Once you have a list of all your estimated expenses, you can add up how much you should be saving monthly. With this information in hand, you know how much to save and can consider how to minimize the impact of periodic expenses when they occur. As part of your homework, you will be completing your own estimate of periodic expenses and calculating the monthly cost. The worksheet is on page 26 of your Passport.

13. Estimated Schedule of Periodic Expenses In our classroom lesson, we had an example of needing $570 per month for periodic expenses, but because there wasn’t enough savings prior to the actual expense, we had to make adjustments. Knowing when expenses might occur may give you some latitude to make changes in when you plan for the expense. It could also give you the opportunity to save a little extra in the earlier months to ensure you have enough savings when the expense actually occurs. By doing advanced planning for these expenses, you have the ability to adapt and not be caught unaware.

14. S.M.A.R.T. Goals In the Budgeting Process diagram on page 6, you see that goal setting is an important step of the budgeting process; so use these guidelines to help you add focus and direction to your goals. Goals are important because they let you see what you’re working toward. Change is never easy, but it’s a lot easier when you know all your hard work will pay off. There are two main types of goals: short-term goals (less than one year) and long-term goals (one year and longer). The people who are most successful in reaching their goals do two things: • They write them down, and • They know what steps are necessary to achieve those goals. The easiest way to determining those steps is to create S.M.A.R.T. goals. S.M.A.R.T. goals take regular, ordinary goals and chunk them up into steps for success: Specific: State exactly what is to be done Measurable: Include how the goal can be measured Actionable: Determine steps to reach the goal Realistic: Do not set goals for something unrealistic Time-Bound: State when the goal will be met EXAMPLE: Goal: I want to buy a new car. S.M.A.R.T. goal: • Specific: I want to save money for a down payment on a new car. • Measurable: I need to save $2,000 for the down payment. • Actionable: I will save $50 from every paycheck ($100 a month). • Realistic: I usually spend $200 a month on dining out and coffee drinks, so I’ll cut that spending in half and put the rest towards my down payment. • Time-Bound: I want to have the $2,000 saved in two years. When you know exactly what needs to be done to accomplish your goals, you’re much more likely to be successful.

15. Budgeting for S.M.A.R.T. Goals Identify cost and timeframe for your goal: What is the total cost for your goal and how long do you have to complete this goal? EXAMPLE: I want to save $3,000 over 2 years for a down payment on a new car. Calculate annual cost: $3,000 ÷ 2 years = $1,500 per year Calculate monthly cost for your budget: $1,500 ÷ 12 months = $125 per month As you create life goals for yourself during your homework assignment, break the cost of the goal into monthly savings needed and include that savings in your monthly budget. Prioritizing Goals Rank goals by importance: Of your goals listed, what should take greatest priority? You assign the priorities according to your values. See worksheet in Passport page 30. When the entire family is involved in establishing and prioritizing goals, you get greater engagement in seeing a goal through to the end. Involve children and spouse and make your goals family projects with everyone playing a role. Common goals and common priorities bond family members together. Highest priority goals receive greatest attention. If you encounter a conflict, evaluate your options available. Do you need to reprioritize? Can you still accomplish your goal with more time? Can you generate more money to help you reach your goal?

16. Data Collection Although data collection is mentioned as the first step in the budgeting process, it is also necessary at the end. It will take you time to adjust your spending plan to something that works for you, and you’ll need to continue to track and collect data to see if your initial budget is realistic. The key is to move from looking at where your money goes to telling it where you want it to go. When creating your budget make sure to consider both historical spending as well as future needs. Helpful Documents When planning your budget, historical records can help you fill in the gaps on where your money has gone in the past. You may find the following documents helpful: • Two or three recent paystubs for each worker and each job • Debit card and checking account statements and register for the past three months • A recent statement for each credit card and other debts and your actual payment for each • Two or three recent statements for all ongoing bills, such as utilities and insurance • Outstanding bills, such as medical, dental, repairs, etc. Having a few months of history allows you to capture more of the irregular expenses that occur so that you can create a more detailed spending plan. No two months are the same; so the more history you have, the better you will be able to plan for the future. Historical statements are great tools to help you identify where your money HAS gone. As we develop our spending plans, we will be integrating our emergency savings, periodic expenses, S.M.A.R.T. goals and debt repayment plans to identify where our money SHOULD go.

17. Post-Test • A spending plan helps you control spending because you are able to: • Keep track of your daily spending and bills due • Determine your monthly income and expenses • Find ways to decrease spending • Find ways to increase income • All of the above • What is the definition of a fixed expense? • An expense that may change annually • An expense that changes from month to month • An expense that stays the same from month to month • An expense that stays the same for a period of time, and then changes • Which of the following are generally considered examples of fixed expenses? Select all that apply. • Car payment • Personal expenses • Electric or gas bill • Rent or mortgage • Which of the following are generally considered examples of variable expenses? Select all that apply. • Food • Child care • Entertainment • Rent or mortgage • Which of the following are examples of how you might control or reduce your expenses? Select all that apply. • Eat out at restaurants • Carry a small amount of cash for purchases • Conserve or use less electricity, gas, or oil • Use your credit card to make most purchases

18. Glossary Discretionary Expenses: Expenses that we can control. Often associated with the “wants” of our spending plan. Discretionary expenses are lifestyle expenses that integrate our values with our spending choices. Fixed Expenses: Expenses with amounts that do not change from month to month. Variable Expenses: Expenses with amounts that often change from month to month. Gross Income: Total income without deductions. Net Income: Gross income minus deductions such as Social Security and other taxes. Non-Discretionary Expenses: Expenses that are not easily controlled. They are the vital expenses that must be accommodated in the budget. Periodic Expenses: Household expenses that occur generally one to four times a year, instead of monthly, such as quarterly insurance premiums or property taxes. Spending Plan: A step-by-step plan for meeting expenses in a given period of time. • Keep track of your daily spending • Determine what your monthly income and expenses are the month before they are due • Find ways to decrease spending • Find ways to increase income