BUDGETING The Basics of Financing for Students
Overview • What is A Budget? • What is A Spending Plan? • Why Do I Need One? • The Truth About Credit Cards • Checking vs. Savings Accounts • Debit Cards • Balancing Your Checkbook • Annual Overview • Back-up Plans • Long-term Financial Goals • Final Overview
What is a spending plan? • A spending plan is developed by collecting all the data necessary to create your budget. • You will need to write down a list of your monthly expenditures, including rent, insurance, utilities, loan payments, car payments, credit card bills, cell phone bill, etc. • Next, determine the amount of spend-able income you receive each month. (Calculate income minus taxes= spend-able income) • Calculate the total of the monthly expenditures from above and subtract that number from the spend-able income you have each month. • If you have a positive number as a result, you can use this as you desire, whether it be to save the extra funds for future expenses or rainy days! • If you have a negative number as a result, you need to re-evaluate the amount of expenditures you have, and determine where the spend-able income is going. Then re-work your spending plan to make a positive result.
What is a budget? • According to dictionary.com a budget is: “An itemized summary of estimated or intended expenditures for a given period along with proposals for financing them.” • A budget, simply stated, is a way to monitor the amount of money that comes into and out of your bank account.
Why do I need one? • It’s important to budget your money so that you don’t run out, overdraw your account, get charged late fees, or get stuck owing money when you have none! • It helps keep in perspective a healthy budget to work with each month. • Making a budget helps you become more responsible in handling your expenses. • The skills you gain from completing one can be transferred to your company’s budgets and expenditures as well!
The truth about credit cards • Credit card companies will offer introductory rates to entice applicants, but will jump to higher rates immediately after that introductory period. • They expect the applicants to pay only the minimum payments so the company can charge the high interest rates to each consecutive amount due. • It is better to pay off the total amount due at once rather than paying the minimum balance each time. If you continue to pay only the minimum balance, it can easily take years to pay off the entire balance due. • If you are not careful with your spending habits, you can easily ‘max out’ a credit card. By ‘maxing out’ a card, you have reached your spending limit.
Checking vs. Savings Accounts • A checking account does not accrue interest. • A checking account allows you to deposit, withdraw, write checks, use debit/ ATM cards, and have a varying balance. • A savings account accrues interest over time. • With a savings account, there is usually an opening deposit required (there are a few exceptions- check with the individual banks). • You can only withdraw from a savings account a limited number of times per month.
Debit Cards • A debit card is directly connected to your checking account, and has the option of using savings for overdraft protection. • Each use is deducted from your checking account. • You can withdraw cash from an ATM with a debit card. • You can use your debit card anywhere you can use a credit card; it works the same way a credit card does, but it draws money from your bank account. • When all the money is depleted from your checking account, unless you deposit more funds, there will be no more money to withdraw.
Balancing Your Checkbook • Balancing your check book is as easy as addition and subtraction. • Gather all of the receipts from purchases made with checks and or your debit card and all deposit slips from bank transactions. • Write each of these deposits and withdrawals in order according to the date that they took place. • Calculate the total amount according to whether you withdrew or deposited funds from the total amount currently available. • Example: Current Balance= $3,027.14 • Withdrawal= 24.12 • New Total= $3,003.02 • Deposit= 22.05 • New Total= $3,025.07
Annual Overview • This is an easy way to see the BIG PICTURE! • Estimate your total annual income. • Estimate your total expenses per month (rent, utilities, insurance, car payments, credit cards, etc.) and multiply by 12. • Add up all the total expenses and subtract from your annual income. • The amount left should be positive and can be perceived as money allocated to other funds. • By putting your total income and total annual expenses into perspective, it is easier to see how much money you can put towards emergencies, fun money, savings, etc.
Back-up Plans • A back-up plan is an easy way to save a certain amount of money each month for emergencies- whether it be health related, car-related, or nature-related. • Specify a certain amount to put aside each month to put into a separate savings account for emergencies only. • Do not use this money for any other purpose than an emergency basis. • Example #1: Vacation Trip to Beach • Set aside $40 from each paycheck • $40 x 12 months = $480 for the entire trip! • Example #2: Auto Repairs • Set aside $35 from each paycheck • $35 x 12 months = $420
Long-Term Financial Goals • Is there something you are interested in saving for that costs a tremendous amount of money? • Are you interested in saving for a car, a house, a trip to Europe? • Again, this is where a budget is crucial. • Use the same skills you learned from making your monthly and annual budgets to make a long-term goal. • The positive amount of spend-able money left over can be divided between emergencies and this new long-term financial goals. • You can determine other ways to bring in extra income to help achieve this long-term goal as well, such as having a yard sale, babysitting, taking another part-time job, saving gift money, etc.
Final Overview • Budgeting can help you keep track of your funds on a regular schedule. • You can learn responsible money-handling skills by budgeting and saving money for future financial goals! • These skills are valuable in that they can be transferable to other opportunities within your life that deal with finances. • To learn more about checking and savings accounts, and other budgeting options- talk to your local bank for further options.