BUDGETING YOUR MONEYPART 1

Mr. Stasa – Willoughby-Eastlake City Schools ©

http://www.youtube.com/watch?v=OiMs5qblQGQ

Review… (It’s back…!)

What is the 70-20-10 rule? What are short-term, intermediate,

and long-term goals? What are SMART goals?

What do you spend money on? Cell phone Soda Snacks Food Clothing Gasoline Car Insurance School supplies Gifts

Why Budget?

A spending plan (budget) is a paper or electronic document used to record planned and actual income through expenditures over a period of time

Income

Food

SavingsInsurance

Housing

Transportation

Taxes/Deductions

Communication

MedicalClothing/Other

Entertainment

Categories

6-Step Spending Plan

Process

Step 1:Set

Financial Goals

Step 1: Set Financial Goals Set financial goals for the present

and the future.

Use the SMART goal process.

Have short-term, intermediate, and long-term goals

Step 2:Estimate

Your Income

Step 2: Estimate Your Income Estimate the amount of income you

expect to earn for the month Paycheck Interest Investment earnings

Do not list income sources that you may not receive Gifts, lottery, etc.

What is Earned Income?

Earned income is income earned through a paycheck or labor provided.

What is Unearned Income?

Unearned income is income received other than through a paycheck or wages.

Examples include: Interest Gifts Investments

Step 3: Plan for Unexpected Emergencies

Step 3: Plan for Unexpected Emergencies

Always save at least 8 months of living expenses at all times for emergencies.

http://www.youtube.com/watch?v=E_ctwPiDgHk

http://www.youtube.com/watch?v=rGGLmoCWJbI

P.Y.F. PYF (Pay Yourself First)

Always set aside money to save for emergencies and goals before spending.

http://www.youtube.com/watch?v=NKjFhUkf42o

Emergency Fund

An emergency fund is money that is saved for unexpected emergencies.

Unexpected emergencies may include: Car repairs Job loss Health problems

http://www.youtube.com/watch?v=E_ctwPiDgHk

Step 4: Budget Fixed Expenses

Fixed expenses are monthly expenses which do not change in price.

Examples include: Mortgage payments Student loan payments Car payments Car insurance Health insurance

Step 5:Budget Flexible Expenses

Flexible expenses are monthly expenses which change in price each month.

Examples include: Gas Electricity Water Groceries

http://www.monkeysee.com/play/6313-what-is-the-difference-between-a-fixed-and-variable-expense

Step 6: Record Actual Spending List how much you actually earned

and spent.

You will sometimes spend exactly what you estimated, more, or less.

Step 6: Record Actual Spending

A budget variance is the difference between your estimated spending amounts and actual amounts.

A budget surplus is when you spend less than you estimated

A budget deficit is when you spend more than you estimated.

Budgeting Part II

Ian Mitchell

Income - $30,000

Net Worth - $50,000

Income - $85,000

Net Worth - $35,000What is your definition of financial wealth? How is it that Ian is wealthier than Mitchell, yet Mitchell makes more than double the income than Ian? What factors do you think could cause such a difference?

ASSETS LIABILITIES

Checking acct

$800 Credit card $1,200

Savings Account

$4,000 Car loan $3,500

Pepsi stock $6,500 House mortgage

$123,000

Retirement fund

$16,000 Computer payments

$500

House $140,000 Student loans $23,000

Furniture $8,000 TOTAL LIABILITIES

$151,200

Car $14,500 NET WORTH:

Loan to brother

$3,000 Assets – Liabilities = Net worth

Jewelry $400 193,200-151,200 = $42,000

TOTAL ASSETS

$193,200

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Personal Balance Sheet

What’s a personal balance sheet?

A personal balance sheet is a current snapshot of your financial situation.

A personal balance sheet lists Current assets (amounts you own) Current liabilities (amounts you

owe) Net worth (measure of your

wealth)

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To determine exactly how much money you own and owe

To track progress towards goals Lenders will ask at the time of

applying for loans, accounts, life insurance, etc.

Provides a financial report card that allows you to evaluate your current financial health

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Why do you need a personal balance sheet?

What Should My Net Worth be Doing? Your net worth should increase

as you age because…. You gain more assets as you age Your debts are gradually paid off as

you age Once you retire, your net worth

will gradually decrease

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How Much Should it be?

Net Worth Estimation Formula

Example: At the age of 22, earning $35,000 per year…

22 x 35,000 / 10 = $77,000

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http://video.cnbc.com/gallery/?video=3000164039

What About Beth? Calculate if Beth’s net worth of $307,111 is on track from the

Suze Orman clip: http://video.cnbc.com/gallery/?video=3000164039

Beth’s current age:

Beth’s monthly income:

Beth’s annual household income (multiply her monthly income by 12)

What should Beth’s estimated net worth be?

Is Beth’s current net worth on track or off track of where she should be?

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43 years old

$3,100

$3,100 x 12 = $37,200

43 x $37,200 / 10 = $159,960

Beth’s current net worth is $307,111Her current net worth is more than on track of where it should be.

Categories of a Balance Sheet

1. An asset is any item of value that you own

Examples: Cash Property Collectibles Investments

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How much is it worth?

You should list assets at their current value, not the value they were purchased at.

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Use fair market value!

The fair market value is the price at which a willing and rationale buyer would pay.

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Derek purchased a car for $12,000 two years ago

Today’s current market value = $8,500

Example:

Categories of a Balance Sheet Liabilities: Debts you owe that have not

been fully paid

Examples: Loans Mortgage Credit card bills Medical bills

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What’s net worth

Net worth is a true measure of your wealth.

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Assets Liabilities

Net Worth

http://video.cnbc.com/gallery/?video=3000164039

Net Worth vs. Income

Net Worth Income

A person may have high income and low net worth or vice versa

Depends on how a person manages their

income

Money received such as wages earned from

working for pay

Figure this out…

What is your current net worth if you have $4,000 in assets and $1,250 in liabilities?

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ASSETS - LIABILITIES = NET WORTH

$4,000 - $1,250 = $2,750

So who is wealthier?

Ian’s Statement of Financial Position Mitchell’s Statement of Financial PositionAssets Assets

Home 60,000 Home 100,000Retirement Savings

20,0005,000

Retirement Savings

20,0007,000

Automobile 10,000 Automobile 20,000Total Assets $95,000 Total Assets $147,000

Liabilities LiabilitiesMortgage (house loan) 40,000 Mortgage (house loan) 80,000College loan 5,000 College loan 20,000Automobile loan 0 Automobile loan 10,000Credit card debt 0 Credit card debt 2,000Total Liabilities $45,000 Total Liabilities $112,000Net Worth $50,000 Net Worth $35,000

Income - $30,000Net Worth - $50,000

Income - $85,000Net Worth - $35,000

ASSETS LIABILITIES

Checking acct

$800 Credit card $1,200

Savings Account

$4,000 Car loan $3,500

Pepsi stock $6,500 House mortgage

$123,000

Retirement fund

$16,000 Computer payments

$500

House $140,000 Student loans $23,000

Furniture $8,000 TOTAL LIABILITIES

$151,200

Car $14,500 NET WORTH:

Loan to brother

$3,000 Assets – Liabilities = Net worth

Jewelry $400 193,200-151,200 = $42,000

TOTAL ASSETS

$193,200

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Personal Balance Sheet