Chapter 16-2 Budgeting Technique
What is a Budget? • A plan for saving and spending. • Allows you to meet your personal goals with a system of wise spending.
Purpose of a Budget • Live within your income • Achieve your financial goals • Buy wisely • Avoid credit problems • Plan for financial emergencies • Develop good money management skill
Budget Process • Set financial goals • Plan budget categories • Maintain financial records • Evaluate your budget
Setting Financial Goals • Goals point to where you would like to be financially. • This should consist of long term and short term goals for spending and saving money.
Plan Budget Categories • Saving is an all-important part of reaching your financial goals. • The secret to doing this is P.Y.F. or “pay yourself first”. • Saving should become another “expense” included in your budget. • There are two types of living expenses; Variable and Fixed.
Fixed Expenses • Cost that occur on a regular basis and are for the same amount each time. • Examples: rent, mortgage payment, insurance premiums
Variable Expenses • Living costs that differ each time and may not be as easy to estimate. • Examples: food, clothing, utilities
Allowances • The amount of money you plan to use for a certain budget category.
Common Budget Categories • Savings • Food • Clothing • Housing • Transportation • Health and Personal Care • Recreation and Education • Utilities
Maintain Financial Records • Individuals should record their income and expense to find out if the plan is working. • Expenditures are recorded throughout the month. • The checkbook serves as a reference.
Evaluate Your Budget • Actual spending is compared with budgeted amounts and any difference between these amounts is a budget variance. • Deficit: when actual spending is greater than planned spending • Surplus: when actual spending is less than budget amount
Characteristics of an Effective Budget • Realistic • Flexible • Evaluated regularly • Well planned and clearly communicated • Simple format