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Budgets

Budgets. “Directly or indirectly, you’ve probably already spent some money today.”. Personal Budget. A working tool that helps you take control of your money A plan for managing your money, for a specific period of time Directs the flow of cash received towards financial goals

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Budgets

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  1. Budgets “Directly or indirectly, you’ve probably already spent some money today.”

  2. Personal Budget • A working tool that helps you take control of your money • A plan for managing your money, for a specific period of time • Directs the flow of cash received towards financial goals • Helps you achieve the things you value most • Is flexible and serves as a guideline

  3. …cont Personal Budget • It takes discipline to stick to a budget! • In a working budget, spending and income balance each other out; expenses should NOT exceed income! • Because of limited resources, people who use a budget must make choices about how to spend their money • Opportunity Costs • Delayed Gratification

  4. Two Simples Parts to a Budget • Income (positive value) • Money received from any source (wages, interest, gifts, allowances, etc.) • Spending/Expenses (negative value) • The money you spend on various items (needs and wants)

  5. Income (positive value) • Gross Income • The money you make before any deductions • Net Income • The money you make after deductions • Common Deductions: • Union dues, health insurance, contributions to savings plans, contributions to charities, TAXES • Four common Tax deductions: • Federal Income Tax • State Income Tax • Social Security Tax (FICA Tax) • Medicare Tax (FICA Tax)

  6. Spending/Expenses (negative value) • Fixed Expenses • Any expense/deduction from income that stays consistent (the same) each month/payment • Paying yourself first (P.Y.F.), Rent, child care, health insurance, contributions to savings, IRA contributions, loan payments, insurance, etc. • Variable Expenses • Any expense/deduction from income that changes each month/payment • Utilities, phone, clothing, personal items, gas, food, entertainment, etc. • Use comparison shopping to cut variable expenses! • Coupons, buying in bulk, garage sales, thrift stores, etc.

  7. Keeping Track of Your Money • Checking Account • Checks, ATM card, Debit card • Charges, fees, and other costs • Minimum balances, annual or monthly fees, overdraft protection, insufficient funds charge, ATM fees • Good Record Keeping • The “Envelope System” • Checking account statements • Savings and investments • Insurance • Tax documents • Pay stubs • Loan papers • Big-ticket item receipts and warranties

  8. Preparing a Practical Budget • To prepare a budget, follow these steps: • Step 1: Set Your Financial Goals • Step 2: Estimate Your Income • Step 3: Budget for Unexpected Expenses and Savings • Step 4: Budget for Fixed Expenses • Step 5: Budget for Variable Expenses • Step 6: Record What You Spend • Step 7: Review Spending and Saving Patterns

  9. Charting Where Your Money Goes

  10. Breaking Down a Dollar

  11. Graphing Where Your Money Goes

  12. How to Budget Successfully • A budget should have several important characteristics: • 1st: a good budget is carefully planned • Your estimates cannot be wild guesses, your spending categories must cover all expenses • 2nd: a good budget is practical • If your first full-time job pays you $1,500/month, don’t expect to buy a sports car anytime soon • 3rd: a good budget is flexible • Throughout your life you will encounter unexpected expenses and probably unexpected shifts in income as well • Your budget needs to be easy to revise when changes occur • 4th: a good budget must be written and easily accessible

  13. Personal Balance Sheet • Balance Sheet (net worth statement) • A financial statement that lists the items of value that you own, the debts that you owe, and your net worth • Net Worth • The difference between the amount that you own and the debts that you owe • A measure of your current financial position

  14. Personal Balance Sheet • To create a Personal Balance Sheet, follow these steps: • Step 1: Determine Your Assets • Step 2: Determine Your Liabilities • Step 3: Calculate Your Net Worth • Step 4: Evaluate Your Financial Situation

  15. Step 1: Determine Your Assets • Assets • Any items of value that you own, including cash, property, personal possessions, and investments • Liquid Assets • Real Estate • Personal Possessions • Investment Assets

  16. Liquid Assets • Cash and items that can be quickly converted to cash • Money in your savings and checking accounts

  17. Real Estate Assets • Land that a person/family owns and anything that is on it, such as a house or any other building • Amount recorded on the Balance Sheet is the property’s Market Value • Market Value • The price at which you could sell the property

  18. Personal Possession Assets • Cars and any other “valuable” belongings that are not real estate • No old clothes or used CDs • May list personal possessions on the Balance Sheet at their original cost OR market value

  19. Investment Assets • Retirement accounts and securities such as stocks and bonds • Amount you record should reflect the value of the assets at the time when you prepare the balance sheet

  20. Step 2: Determine Your Liabilities • Liabilities • The debts that you owe • Current Liabilities • Short-term debts that have to be paid within a year • Medical bills, cash loans, taxes, and insurance payments • Long-Term Liabilities • Debts that don’t have to be fully repaid in a year • Car loans, student loans, and mortgage loans • Liabilities includes only money that you will owe for longer than a month • A telephone bill doesn’t qualify as a liability • Utility bills, etc. don’t qualify as a liability

  21. Step 3: Calculate Your Net Worth • Formula • Assets – Liabilities = Net Worth • $3,000 - $700 = $2,300 • Net Worth is only an indication of your general financial situation • A net worth of $62,300 doesn’t mean that you have $62,300 to spend. Much of your wealth may be in stocks, real estate, and personal possessions, which can’t be easily converted to cash. • Although you may have a high net worth, you can still have trouble paying your bills • Insolvency • The condition that occurs if your liabilities are greater than your assets

  22. Step 4: Evaluate Your Financial Situation • You can use a balance sheet to track your financial progress • Up-date your balance sheet, or make a new one, every few months • Chart changes over time • You can increase your net worth by increasing your savings, increasing the value of your investments, reducing your expenses, and/or reducing your debts

  23. Financial Ratios • Debt Ratio • Liquidity Ratio • Debt-Payments Ratio

  24. Debt Ratio • Liabilities divided by Net Worth • $25,000 / $50,000 = 0.5 • Compares your Liabilities to your Net Worth • A low Debt Ratio is desirable

  25. Liquidity Ratio • Liquid Assets divided by monthly Expenses • $10,000 / $4,000 = 2.5 • Indicates the number of months you would be able to pay your living expenses in case of a financial emergency • The higher the Liquidity Ratio, the better

  26. Debt-Payments Ratio • Monthly credit payments divided by take-home/net pay • $540 / $3,600 = 0.15 (15%) • Indicates how much of a person’s earnings goes to pay debts (excluding a home mortgage) • Most financial experts recommend a debt-payment ratio of less than 20%

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