Learning Objectives

Learning Objectives After completing this chapter, you’ll be able to: • Explainhow budgeting is helpful. • List the five steps in planning a budget. continued

Learning Objectives After completing this chapter, you’ll be able to: • Name different types of income and expenses. • Describe how a computer is used in budgeting.

Why It’s Important Budgeting techniques help you keep track of where your money goes so that you can make it go further.

Key Words money management budget income gross pay deductions net pay continued

Key Words withholding expenditures fixed expenses variable expenses budget variance

Lifestyle Costs • Money management is the process of planning how to get the most from your money.

Lifestyle Costs A budget is a plan for using your money in a way that best meets your wants and needs.

Lifestyle Costs A budget includes a record of your expected income, your planned expenses, and your planned savings over a certain period of time.

Figure 28.1 AVERAGE HOUSEHOLD EXPENSES This graph shows how an average household in the United States spends its money. If a family earned about $3,125 a month, how much, (on average) would that family spend on housing?

Lifestyle Costs The five steps in planning a budget are: • Setting your goals • Estimating your income • Estimating your expenses continued

Lifestyle Costs • Planning for savings • Balancing and adjusting your budget as needed

Set Goals – Step 1 A budget should help you decide which goals you can meet with the amount of money you have.

Consider the following questions… What do I want to accomplish in next month? Next year? Next 5 years? What is important to me? Is it practical? Set Goals – Step 1

EstimateIncome – Step 2 • Your income is the actual amount of money you earn or receive during a given time period. • Pay check • Interest • Allowance

EstimateIncome – Step 2 Gross Pay • Your gross pay is the total amount of money you earned for a specific time. • Before deductions • Example: 20 hrs @ $6.50 = $160 • $160 is your gross pay for a week

EstimateIncome – Step 2 Net Pay • Your gross pay is reduced by various deductions, or amounts that are taken out of your pay before you receive your paycheck. • What are some deductions?

EstimateIncome – Step 2 Net Pay Your net pay, or take-home pay, is your gross pay minus deductions.

EstimateIncome – Step 2 Other Income If your net pay is the only income you have to consider, it’s easy to figure your total income. If part of your income is from tips, don’t overestimate how much you expect to receive in tips.

EstimateIncome – Step 2 Taxes • Withholding, or subtracting taxes from a paycheck to be forwarded to the government, may include federal, state, and local income taxes. • Includes your contribution to social security

EstimateIncome – Step 2 Taxes Employers are responsible for forwarding the taxes that are withheld to the government.

EstimateIncome – Step 2 Taxes Workers who don’t have all taxes withheld from their paychecks must budget for payment of those taxes.

Estimate Expenses – Step 3 Items you have to spend money on such as food, rent, and clothing are called expenditures.

Estimate Expenses – Step 3 Estimate Expenses The two basic types of expenses are: • Fixed expenses • Variable expenses

Estimate Expenses – Step 3 Fixed Expenses Fixed expenses are expenses that occur regularly and that are regularly paid. For example, rent and insurance, What are some other fixed expenses

Estimate Expenses – Step 3 Variable Expenses Variable expenses are expenses that fluctuate from month to month. For example, food and entertainment. What are some other variable expenses

Plan for Savings – Step 4 Savings protect you against expenses that you didn’t budget, that are higher than you expected, or that are completely unexpected.

Balance and Adjust the Budget – Step 5 The total estimated income for a period should equal the total estimated expenses.

Balance and Adjust the Budget – Step 5 Balance and Adjust the Budget • The difference between how much you planned to spend and how much you actually spent is the budget variance. • If total expenses > total income, make adjustments • What adjustments could be made?

Graphic Organizer Graphic Organizer Planning a Budget Set Goals Estimate Income Estimate Expenses Plan for Savings Balance and Adjust the Budget

Fast Review • What is the difference between gross pay and net pay? • Give some examples of deductions. continued

Fast Review • What types of taxes are often withheld from a paycheck? • Give examples of variable expenses. continued

Fast Review • What is budget variance?

A Sample Budget Let’s follow the steps that a young couple, Michael and Nora Kemal, used to set up a budget.

Step 1: Setting Goals • First, the Kemals drew up a list of their goals, both short-term and long-term. • Then decided which wants were most important to them

Step 2: Estimating Income Michael, a salesperson, earns a gross annual income of $19,000. Nora is a management trainee and earns $21,500 a year.

Step 2: Estimating Income Although the Kemals earn a total of $40,500, their take-home pay is only about $31,200. They used that amount in their planning.

Step 2: Estimating Income If the Kemals had an income from investments or rental properties, they would include this income in their budget.

Step 3: Estimating Expenses The Kemals kept a record of actual expenses for the past several months. • Then they made a list of planned expenses and savings for the year. • List included fixed and variable expenses

Step 4: Planning for Savings The Kemals’ savings budget reflects their goals. To begin saving for a vacation, they’re cutting their entertainment expenses.

Figure 28.2 THE KEMALS’ FAMILY BUDGET A budget should be broken down into annual and monthly amounts for each category. Identify how much the Kemals spend on insurance payments.

Step 4: Planning for Savings When they developed their budget, Michael and Nora had to be sure that the total income figure was the same as the total for planned expenses and savings.

Step 5: Balancing and Adjusting the Budget After their budget was prepared, the Kemals kept records of their actual expenses and organized their expenses into various categories.

Step 5: Balancing and Adjusting the Budget The Kemals divided the yearly figures by 12 to estimate how to manage their money from one month to the next.

Step 5: Balancing and Adjusting the Budget The Kemals compared their monthly totals with their budgeted amounts to see if they were keeping within their budget.

Balancing the Budget The Kemals’ total expenses were close to their total income for the month. They were living within their budget.

Adjusting the Budget The Kemals decided to increase their clothing budget by the amount they reduced the food budget. The Kemals have adjusted their budget according to their needs.

Using a Computer for Budgeting With a computerized budgeting program, you can store your budgeted amounts and enter your expenses as they occur or at the end of the month.

Using a Computer for Budgeting The computer can give you a quick analysis of total expenses, including amounts that are over and under the budget.

Using a Computer for Budgeting In addition, the computer can help with “what if” situations. For example, what if Nora Kemal’s income increased by ten percent, or their rent increased by $50 a month?

Fast Review • What is the Kemals’ gross income and net income? • How did the Kemals’ use their annual figures to come up with a monthly budget?

Learning Objectives