Planning a Budget

Planning a Budget Chapter 28

What happens if we spend more than we earn?

Money Management The process of planning how to get the most from your money. Do you do a good job managing your money? What could you do better?

What is a budget? A budget is a plan for using your money in a way that best meets your needs and wants. A budget puts you in control. It helps you determine in advance how much money you will spend and what you will spend it on.

Why Budgets Make Sense • Budgets help you: • Set priorities • Achieve what’s important to you • A good budget is: • Realistic • Ongoing • Clear and easy to use

Where to start? Step One: Estimate Income How much money will you likely receive next month?

Step Two: Estimate Expenses What would you like to buy, what will it cost, and why do you want it? Sometimes answering the “why” question honestly will help you think through your purchasing goals and put them in the order of importance.

Real World – Out on Your Own When you work at a job, do you get to keep all of the money that you earn? Why not? Where does it go?

Social Security Tax (6.2%) • Medicare Tax (1.45%) • Federal Income Tax (approx. 15%) • State Income Tax (approx. 3%) • Health Insurance • Retirement

Gross Pay- the total amount of money you earned for a specific period of time. It is the amount before deductions. You work 40 hours a week for $10.00 an hour. Gross pay is $400.00 a week

Deductions: Social Security Tax: $400 x 6.2% = $24.80 Medicare Tax: $400 x 1.45% = $5.80 Federal Income Tax: Single w/1 exemption $37.00 State Income Tax: $12.00 Total Deductions: $79.60 Total % taken out: 19.90%

Net Pay – your take-home pay. Gross pay minus deductions. $400.00 - $79.60 = $320.40 Amount used in budget

When on your own, what will you need to spend your money on? • Housing • Transportation • Food • Clothing

Fixed Expenses – expenses that occur regularly and that are regularly paid. Amount does not change…it is fixed. • Rent • Insurance • Car

Variable expenses – expenses that fluctuate or change from month to month. • Food • Clothing • Entertainment • Recreation

Discretionary Expenses A cost determined by personal wants that may be controlled • Movies, videos, CDs • Sports • Eating out • Grooming and clothes • Concerts and plays • Vacations

Plan for Savings! A budget isn’t complete without a regular plan for savings.

Savings: Pay Yourself First • Savings: unspent income • Types • Emergencies: Plan to set aside three months’ living expenses • Long-term: Large ticket items (house, car, college) • Retirement: It’s never to early to start • Short-term: Vacation, clothes, new skis

Emergency Fund - protects you against expenses that you did not budget for. You should try to budget 10% of your income for long-term savings and investing. Have money work for you, not you work for money!

Personal Savings Rate Declining • 1974 to 1984 • 10% • 1985-1994 • Fell to 4.8% • 2004 • 1.8% • 2005 • -0.5% • 2006 • -0.7% • Hasn’t been negative since the Great Depression

Start Saving Young! • Save $2,000 per year from age 19 – 26 • $1,035,148 by age 65 • Save $2,000 per year from age 27 – 65 • $805,185 by age 65 • Time value of money • Invest fewer dollars at a younger age but have 25% more

Investment Scenarios: Invest $100 per month for 20 years in an aggressive growth fund earning on average 10% per year: $75,936.88 Invest $200 per month for 20 years in an aggressive growth fund earning on average 10% per year: $151,873.77

Invest $200 per month for 50 years in an aggressive growth fund earning on average 10% per year: $3,464,878.16

Budget Variance – the difference between how much you planned to spend and how much you actually spent.

Net pay per month: $320.40 x 4 = $1,281.60 Expenses: Rent $500 Car $200 Utilities $100 Food $200 Savings $120 Clothing $100 Total Expenses $1,220 Budget Variance $61.60

Chapter 28 Bookwork • Fast Review (page 460) #’s 1-5 • Fast Review (page 463) #’s 1-2 • Using Business Key Words (page 466) #’s 1-11.

Planning a Budget