money matters, class 2: budgets
DESCRIPTION
Creating a budget is Part 2 of the 6-part Money Matters class, created by the Athens-Clarke County Library. Money Matters is part of Smart investing @ your library®, and is brought to you by a joint grant from the American Library Association and FINRA, the Financial Regulatory Authority Foundation.TRANSCRIPT
Money MattersMoney Mattersclass 2class 2
What is a Budget?What is a Budget?
A budget is an A budget is an
estimate of expected income and estimate of expected income and expenses for a given period in the expenses for a given period in the futurefuture
Why Prepare a Budget?Why Prepare a Budget?
A budget is a A budget is a tooltool to help you understand to help you understand where your money goes.where your money goes.
A budget allows A budget allows youyou to decide how much to decide how much and when you spend your income.and when you spend your income.
A budget allows you to make and reach A budget allows you to make and reach your financial your financial goalsgoals..
A budget is the cornerstone of a solid A budget is the cornerstone of a solid financial future. financial future.
““Budgets are all about financial freedom. Budgets are all about financial freedom. Without a plan for saving and spending, Without a plan for saving and spending, you’ll never make the most of your income you’ll never make the most of your income – no matter how much money you earn.– no matter how much money you earn.
““Budgets are very empowering”Budgets are very empowering”
““Budgets create financial security”Budgets create financial security”
““They don’t lead you away from something, They don’t lead you away from something, they lead you toward your financial goals” they lead you toward your financial goals”
Tools for Making a Budget Tools for Making a Budget
Option 1 - Pencil, Paper and calculatorOption 1 - Pencil, Paper and calculator
Option 2 - Spreadsheet SoftwareOption 2 - Spreadsheet Software Microsoft Excel, i Work NumbersMicrosoft Excel, i Work Numbers
Option 3 - Money Management SoftwareOption 3 - Money Management Software QuickenQuicken
Option 4 - Spending Management Software OnlineOption 4 - Spending Management Software Online YNAB – You Need A BudgetYNAB – You Need A Budget Mint.comMint.com
BUDGETBUDGET
What do I need to prepare a budget?What do I need to prepare a budget? List of incomeList of income List of expenses, including debt paymentsList of expenses, including debt payments
Types of ExpensesTypes of Expenses
Fixed Expenses:Fixed Expenses:remain the same each monthremain the same each month
Variable Expenses:Variable Expenses: vary from month to monthvary from month to month
Periodic Expense: Periodic Expense: Occur only once or twice a yearOccur only once or twice a year
Fixed Expenses (amount stays the same each
month)
Actual Expense
Notes
Rent/Mortgage
Homeowner's / Renter's Insurance
Car Payment
Car Insurance
Loan #1
Child Support
Day Care
Cable TV
Internet
Total Fixed Expenses
Variable Expenses Budgeted Expense Actual Expense
Credit Card
Electric
Gas
Telephone
Cell Phone
Water / Sewer
Groceries (Food Only)
Eating out
Household / Misc
Tobacco / Alcohol
Gasoline
Bus / Parking
Laundromat / Dry Cleaning
Barber/Beauty Shop
Newspapers / Magazines
Allowance/Spending Money
Recreation
Pet Expenses
Church/Charity
Postage
Total Variable Expenses
Monthly ExpensesMonthly Expenses
Include those items that are paid Include those items that are paid periodicallyperiodically
Annual Car Tag Annual Car Tag - $144 / 12 = $12 per month- $144 / 12 = $12 per month
Quarterly Pest ControlQuarterly Pest Control - $90 / 3 = $30 per month- $90 / 3 = $30 per month
Periodic ExpenseBudgeted Expense Actual Expense
Car Repair/Maintenance
Car Tag/Inspection
Doctor/Dentist
Medications/Prescriptions
Clothing/Shoes
Home Repair/Maintenance
Gifts
Total Periodic Expenses
Total Monthly Income (+)
Total Monthly Expense (-)
Total Extra/ Shortfall (=)
Creating a BudgetCreating a Budget
1.1. Identify your Identify your net monthly incomenet monthly income
2.2. Identify your Identify your monthly expensesmonthly expenses
3.3. Monthly Income – Monthly Expenses =Monthly Income – Monthly Expenses = Income greater than expenses – savings $Income greater than expenses – savings $ Expenses greater than income – debtExpenses greater than income – debt
4.4. Balance your Budget!Balance your Budget!
Things to Keep in MindThings to Keep in Mind
1.1. Your budget should be tailored to YOUR Your budget should be tailored to YOUR needs and goalsneeds and goals
2.2. Be realisticBe realistic
3.3. Save for the unexpected. It can and will Save for the unexpected. It can and will happenhappen
4.4. Involve the entire familyInvolve the entire family
5.5. Keep it simpleKeep it simple
6.6. Don’t panic if your expenses exceed your Don’t panic if your expenses exceed your incomeincome
Evaluate and Reduce SpendingEvaluate and Reduce Spending
1.1. Is this expense absolutely necessary?Is this expense absolutely necessary?
2.2. If not, can we do without it? If not, can we do without it? • Is it a want or a need?Is it a want or a need?
3.3. If not, can you substantially reduce your If not, can you substantially reduce your spending?spending?
MONEY WORRIES...Make a Budget and Stick to IT!
Budget BombsBudget Bombs
Cut out all the fun stuffCut out all the fun stuff Be hit or miss with savingsBe hit or miss with savings Overuse debit cardOveruse debit card Pay only the minimums on cardsPay only the minimums on cards Live without emergency savingsLive without emergency savings Spend more than you earnSpend more than you earn
Envelope SystemEnvelope System
1.1. Budget each paycheckBudget each paycheck2.2. Determine which categories you will pay in Determine which categories you will pay in
cashcash3.3. Fill’er UpFill’er Up4.4. Pay with cash and keep receiptsPay with cash and keep receipts5.5. When it’s gone, it’s goneWhen it’s gone, it’s gone6.6. Don’t be tempted by debit cardsDon’t be tempted by debit cards7.7. Give it time Give it time 8.8. Have some FUN!Have some FUN!
Setting Financial GoalsSetting Financial Goals
People don’t plan to fail, they fail to planPeople don’t plan to fail, they fail to plan
People with a financial plan tend to:People with a financial plan tend to:$ save more moneysave more money$ feel better about their progressfeel better about their progress$ make better financial decisions, make better financial decisions,
regardless of their income level.regardless of their income level.
Goal setting should be a family affairGoal setting should be a family affair
Short-term Goals (2 years or less)Short-term Goals (2 years or less)
Mid-term Goals (within 2-5 years)Mid-term Goals (within 2-5 years)
Long-term Goals (5 years or more)Long-term Goals (5 years or more)
Goal setting is a terrific motivator!Goal setting is a terrific motivator!
ExamplesExamples
Build an Emergency FundBuild an Emergency Fund Get your debt under controlGet your debt under control Save for a down payment on a car or Save for a down payment on a car or
homehome Save for retirementSave for retirement Save for something important to you or Save for something important to you or
your familyyour family
Establishing an Emergency FundEstablishing an Emergency Fund
11stst goal of every family should be to establish goal of every family should be to establish an emergency fundan emergency fund
3-6 months expenses3-6 months expenses The basics are rent (mortgage), heat, lights, The basics are rent (mortgage), heat, lights,
phone, food and transportation to workphone, food and transportation to work Save each month until you reach your goalSave each month until you reach your goal Keep the money in a safe easily available Keep the money in a safe easily available
accountaccount Leave your emergency fund aloneLeave your emergency fund alone
SMARTSMART
SSpecific – pecific – what you want to achieve and whywhat you want to achieve and why
MMeasurable – easurable – how much money will you need to how much money will you need to save each monthsave each month
AAttainable – ttainable – when you want to achieve the goalwhen you want to achieve the goal
RRealistic – ealistic – it can be achieved with the time and it can be achieved with the time and money availablemoney available
TTrackable – rackable – specific time framespecific time frame
GOAL TYPE TIME AMOUNTAMOUNT EACH Month
Emergency Fund Mid-term 2 years $2500.00 $104.00
Christmas Gifts Short-term 12 months $600.00 $50.00
Down Payment on a house Long-term 5 years $12,000.00 $200.00
Money Habits of MillionairesMoney Habits of Millionaires
1.1. Millionaires buy used cars.Millionaires buy used cars.2.2. Millionaires make their kids take out loansMillionaires make their kids take out loans3.3. Millionaires do not see themselves as richMillionaires do not see themselves as rich4.4. Millionaires do not all own vacation homes Millionaires do not all own vacation homes 5.5. Millionaires tend to love what they doMillionaires tend to love what they do6.6. Millionaires believe in delayed gratificationMillionaires believe in delayed gratification7.7. Millionaires track their moneyMillionaires track their money8.8. Millionaires don’t need to flaunt their wealthMillionaires don’t need to flaunt their wealth9.9. Millionaires shop with a listMillionaires shop with a list
Budget ExampleBudget Example
Monthly Income $
Monthly Expenses
Rent $
Savings $
Car Payment $
Utilities $
Phone $
Food $
Fun $
Clothes $
Miscellaneous $
Total Expenses $
Savings PlanSavings Plan
SAVE, SAVE, SAVESAVE, SAVE, SAVE
Start now no matter how small your savingsStart now no matter how small your savings Pay yourself first, use automatic deductionsPay yourself first, use automatic deductions Put your savings into a separate account that Put your savings into a separate account that
does not have ATM accessdoes not have ATM access Put any pay raises, bonuses or tax refunds into Put any pay raises, bonuses or tax refunds into
savings after you complete your emergency savings after you complete your emergency fund. fund.
Simple InterestSimple Interest
Interest RateInterest Rate - the stated rate of interest paid each year - the stated rate of interest paid each year
$1,000 x 6% (.06) = $60 per year$1,000 x 6% (.06) = $60 per year
Value after 12 years = 1,720Value after 12 years = 1,720
$1,000$1,000 principalprincipal$ 720$ 720 interest earned ($60 x 12 years)interest earned ($60 x 12 years)$1,720$1,720
Compound InterestCompound Interest
APYAPY(Annual percentage yield) (Annual percentage yield)
takes into accounttakes into account
the compoundingthe compounding
effect of interesteffect of interest
YEAR $1,000.00 x 6% = $ 60.00
1 $1,060.00 x 6% = $ 63.60
2 $1,123.60 x 6% = $ 67.42
3 $1,191.02 x 6% = $ 71.46
4 $1,262.48 x 6% = $ 75.75
5 $1,338.23 x 6% = $ 80.29
6 $1,418.52 x 6% = $ 85.11
7 $1,503.63 x 6% = $ 90.22
8 $1,593.85 x 6% = $ 95.63
9 $1,689.48 x 6% = $ 101.37
10 $1,790.85 x 6% = $ 107.45
11 $1,898.30 x 6% = $ 113.90
12 $2,012.20
The Rule of 72 – calculate how many years The Rule of 72 – calculate how many years it will take for compounding to double your it will take for compounding to double your money at a specified interest rate.money at a specified interest rate.
72 / interest rate = years to 72 / interest rate = years to
double your moneydouble your money
For example, let’s say you have $1,000 and For example, let’s say you have $1,000 and you want to know how long it will take to you want to know how long it will take to double your money @ 6% interest per double your money @ 6% interest per year.year.
72 / 6 = 12 years 72 / 6 = 12 years $2,000$2,000
If you deposited an additional $100 per year If you deposited an additional $100 per year into your account you would reach $2,000 into your account you would reach $2,000 in just 6 years!in just 6 years!
The magic of compounding interest is that The magic of compounding interest is that you earn interest not only on the principal, you earn interest not only on the principal,
but also on the interest you accumulate but also on the interest you accumulate each year.each year.
The Value of TimeThe Value of Time
Many people struggle to get from one paycheck to Many people struggle to get from one paycheck to the next, but not saving now will hurt you later.the next, but not saving now will hurt you later.
$50 per month in a retirement account at 5% $50 per month in a retirement account at 5% interest will be worthinterest will be worth
$21,000 in 20 years$21,000 in 20 years $42,000 in 30 years$42,000 in 30 years $76,000 in 40 years$76,000 in 40 years