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16-2. Budgeting Techniques. A budget allows you to meet your personal goals with a system of saving and wise spending. The main purposes of a budget are: Live within your income Achieve your financial goals Buy wisely Avoid credit problems Plan for financial emergences

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Budgeting Techniques


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budget activities

A budget allows you to meet your personal goals with a system of saving and wise spending.

  • The main purposes of a budget are:
    • Live within your income
    • Achieve your financial goals
    • Buy wisely
    • Avoid credit problems
    • Plan for financial emergences
    • Develop good money management
Budget Activities
budget activities cont

Having a budget is key to money management

    • Should be written down
    • May be simple
    • May be elaborate
  • Should include
    • How much you make
    • Where every dollar you have is going
Budget activities cont.
the budget process

Set Financial Goals

Plan Budget Categories

Maintain Financial Records

Evaluate Your Budget

The Budget Process
set financial goals

Setting goals are critical

    • First step of any financial action
    • Where would you like to be financially?
  • Write down both short term andlong term goals to determine how much to spend or save.
  • Things such as going to college will have an affect on your goals. i.e. you will need to save more when working in the summer.
Set Financial Goals
plan budget categories

The first part of a budget is to plan for savings

    • If not other expenses may use all available income
  • After savings 2 types of living expenses
    • Fixed- same amount every month i.e. Rent
    • Variable expenses- different amounts each month. i.e. food, utilities.
  • Allowance is the amount of money you plan to use for a certain budget category.
Plan budget categories
eight main budget categories

Savings, 5-10%

    • Savings accounts, govt. bonds, stocks, investments
  • Food, 5-15%
    • Food eaten at home and away from home
  • Clothing, 2-7%
    • Clothes, shoes, dry cleaning, and repairs
  • Household, 25-35%
    • Rent, mortgage, property taxes, insurance, utilities, furnishings, household supplies, painting, and repairs
Eight main budget categories
eight main budget categorize cont

Transportation, 10-15%

    • Auto payments, insurance, operating costs, maintenance, repairs, and public transportation
  • Health and personal care, 10-20%
    • Medical and dental expenses, medications, eyeglasses, health insurance, and personal care costs.
  • Recreation and education, 5-10%
    • Books and other reading materials, theater tickets, concerts, vacations, school expenses, hobbies, and club dues.
  • Gifts and contributions, 10-15%
    • Charitable contributions and personal gifts.
Eight main budget categorize cont.
budget cont

Next ask yourself “how much should I set aside for each category?”

    • This will depend on family size, age, cost of living in your area, and work expenses.
  • You can look at your cash flow statement to see which categories your money was being spent in the previous month.
Budget cont
family budget for a month what percentage of net income have they set aside is it enough

Jones Household

Monthly budgets

Aug, 2010

Estimated income Estimated expenses

Manuel's net income $4,225 Savings $2,225

Lydia’s net income $4,350 Food $1,100

Clothing $475

Household $1,875

Transportation $1,275

Health & personal care $450

Recreation & education $800

Gifts & Contributions $425

Total Net income $8,575 Total expenses $8,575

Family budget for a monthWhat percentage of net income have they set aside?Is it enough
evaluate your budget

At the end of the month your income and expense record is totaled

    • Compare these amounts to your budget
  • When spending is more than budgeted it is a Deficit
  • When spending is less it is a surplus
  • This is a good time to make changes if necessary.
Evaluate your budget
characteristics of an effective budget

Must be realistic

    • It should reflect current income and planned spending
  • Should be flexible
    • When unexpected expenses arise, your spending plan should be able to adapt for these living costs.
  • Should be evaluated regularly
    • Every few months, evaluate the budget to determine whether it is still appropriate
Characteristics of an effective budget
effective budget cont

Must be well planned and clearly communicated

    • All family members should discuss financial goals, wants, and needs, and plans for spending.
  • Should have a simple format
    • If it is too detailed and difficult to understand, family members may not be willing to use the spending plan.
Effective budget cont
types of budget formats

Budgeting software programs allow you to develop a budget, keep track of your accounts and pay bills.

Hand written and computerized (excel) budgets are most common.

Some people try to keep budgets in their heads

Types of budget formats