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  1. 1. Chapter 8 Budgeting
  2. 2. Budgeting <ul><li>Budgeting or a spending plan is a process of income allocation for spending need </li></ul><ul><li>Prior to that individual should determine their financial goals </li></ul><ul><li>Budgeting is based on past expenses of the items </li></ul><ul><li>The budget would involved the expected monthly income & expenses and carried out for one year </li></ul><ul><li>It is budgeted before the income or expenses occurred </li></ul><ul><li>Categories of items are written in the spending plan </li></ul>
  3. 3. The Importance of Budgeting <ul><li>Helps individual to save to purchase for items needed, thus reducing the use of credit </li></ul><ul><li>Enable an individual to live within his income </li></ul><ul><li>One way to overcome financial tense in family due to financial matters </li></ul><ul><li>Helps to keep records for items that are taxable for the purpose of income tax </li></ul><ul><li>Enable the individual to control and record expenses </li></ul><ul><li>Enable specific financial goals to be achieved </li></ul><ul><li>Helps individual to be prepared for financial emergencies </li></ul><ul><li>Assist the individual in directing the income to important expenses </li></ul>
  4. 4. Objectives of Budgeting <ul><li>To implement a proper & disciplined spending – individuals must follow the amount allocated </li></ul><ul><li>To reduce amount of money wasted through unnecessary spending by </li></ul><ul><li>Reducing interest for credit </li></ul><ul><li>Buying items that involved large sum of money at different period of time (eg. Different months) </li></ul><ul><li>Discussing with family members the items that should be bought at certain time </li></ul>
  5. 5. Budgeting (cont.) <ul><li>There are 3 steps in budgeting </li></ul><ul><li>Planning the spending plan </li></ul><ul><li>Estimating available income </li></ul><ul><li>Defining major expense categories & setting budget levels </li></ul><ul><li>2. Implementing the spending plan </li></ul><ul><li>3. Evaluating the spending plan </li></ul>
  6. 6. Steps in Budgeting <ul><li>Planning the spending plan </li></ul><ul><li>i. Estimating available income </li></ul><ul><li>Income are identified, make a list or table of income that might be received the following year </li></ul><ul><li>Income may be based to the past income with a little adjustment </li></ul><ul><li>Income include: </li></ul><ul><ul><li>Salary (later minus the income-tax) </li></ul></ul><ul><ul><li>Dividend from investment </li></ul></ul><ul><ul><li>Bonus from investment or salary, profit from business </li></ul></ul><ul><ul><li>Borrowed money </li></ul></ul><ul><ul><li>Money from working children </li></ul></ul><ul><ul><li>Rental from tenant </li></ul></ul><ul><ul><li>Debt repayment by others to you </li></ul></ul>
  7. 7. Steps in Budgeting (cont.) <ul><li>Table of Income </li></ul><ul><li>(for next year) </li></ul>Sources of Income Frequency RM (monthly) Salary Monthly 2,800 Rental Monthly 800 Profit from shares of capital Once in 2 years, not receiving next year - Total income 3,600
  8. 8. Steps in Budgeting (cont.) <ul><li>ii. Defining major expense categories & setting budget levels </li></ul><ul><li>Consider the spending habit of family members & discussed </li></ul><ul><li>Review the suitability of financial goals </li></ul><ul><li>Allocate amount of money for expenses: </li></ul><ul><ul><li>Identify the expenses & the amount that will be spend the following year by referring to expenses made in the previous year (Worksheet for Recording Expenses) </li></ul></ul><ul><ul><li>For annual expenses (once a year), calculate the average monthly expenses </li></ul></ul>
  9. 9. <ul><li>Worksheet for Recording Expenses </li></ul><ul><li>(reference for next year) </li></ul>Date Items Amount (RM) Categories Total amount for categories (RM) Cumulative total for month 3/11 4/11 6/11 10/11 11/11 12/11 23/11 Food Car installment Rental Food Life insurance Sportswear Food 290 380 300 80 180 260 150 - Car installment Rental - Life insurance Clothes Food - 380 300 - 180 260 520 Total for November 1,610 1,610 5/12 6/12 8/12 15/12 20/12 22/12 Rental Food Car installment Life insurance School uniform Food 300 160 380 180 310 510 Rental - Car installment Life insurance Clothes Food 300 - 380 180 310 670 Total for December 1,840 1,840
  10. 10. Budgeting (cont.) <ul><li>Table of Past Expenses (used the amount for next year) </li></ul>Categories of Expenses Frequency Total a year (past) RM Monthly expenses (past) RM Clothes -school uniform -sportswear -clothes for festive seasons -casual wear - office attire Once a year (December) Twice a year (January, June) Twice a year Twice a year (March, August) Twice a year (April, October) 350 480 1,300 770 820 310 Total for clothes 3,720 <ul><li>Food </li></ul><ul><li>-food at the office & school </li></ul><ul><li>food at home </li></ul><ul><li>outside eating </li></ul><ul><li>food for festive & party </li></ul>5 days a week Everyday Once a week 4 times a year 3,800 5,000 1,000 400 850 Total for food 10,200
  11. 11. Steps in Budgeting (cont.) <ul><li>Implementing the spending plan </li></ul><ul><li>Use a summary of the budget (table) to monitor and control expenses </li></ul><ul><li>When spending, keep all records related to expenses. Eg. Receipts for payment of utility bills, purchasing items receipts, receipts of payment of fees, statement on depositing money for payments of car loan, home loan </li></ul><ul><li>Write down all expenses for a certain category of expenses & get the monthly total amount. Eg. Clothes, food </li></ul><ul><li>Some items may not be categorised eg. Car installment, electricity bills </li></ul><ul><li>For annual expenses, write down the actual amount spent in the specific month </li></ul>
  12. 12. Table of Budget Summary Monthly Spending Plan January (RM) Surplus (Deficit) February (RM) Surplus (Deficit) Total Income 3,600 3,600 - 3,600 - Expenses Food Clothes House rental Car installment Income tax Car insurance & road-tax Telephone bill Electricity bill Water bill Life insurance Others 850 310 300 380 280 60 35 30 45 180 150 880 250 300 380 - 720 40 25 35 180 480 (30) 60 - - 280 (660) (5) 5 10 - (330) 900 - 300 380 - - 45 35 40 180 80 (50) 310 - - 280 60 (10) (5) 5 - 70 Total expenses 2,620 3,290 (670) 1,960 660 Savings Emergency Long-term 50 930 50 260 - (670) 50 1,590 - 660 Total savings 980 310 (670) 1,640 660
  13. 13. Steps in Budgeting (cont.) <ul><li>Evaluating & reviewing the spending plan </li></ul><ul><li>Evaluate the spending plan to identify any major differences in expenses or whether the actual spending conform to the budget for that year </li></ul><ul><li>Review the spending plan in periodical. For eg. Review every 3 months </li></ul><ul><li>The review is to ensure that the spending plan or budget is suitable with current changes </li></ul><ul><li>Eg. Changes in family life-cycle, changes in wants, inflation </li></ul><ul><li>If there is any changes in the price or wants of family members, then the spending plan will also be altered </li></ul>
  14. 14. Budgeting (cont.) <ul><li>The income for each month may not be the same due to </li></ul><ul><li>Increase in income starting at certain month (annual increment for permanent job) </li></ul><ul><li>Increase in income due to job promotion </li></ul><ul><li>Bonus or dividend obtained from investment at certain month, usually at the end of the year </li></ul><ul><li>Profit from business incurred once in 2 or 3 months </li></ul><ul><li>House rental may differs as tenant move out or new tenant moves in </li></ul>
  15. 15. Budgeting (cont.) <ul><li>The expenses for each month may also differs due to </li></ul><ul><li>School fees are paid at the beginning of the year </li></ul><ul><li>Other fees may be paid once in 6 months or so on </li></ul><ul><li>Fees for higher education are paid at the beginning of the semester eg. June and November </li></ul><ul><li>Car insurance, road-tax and driving license are paid once a year </li></ul><ul><li>Expenses for festive seasons or schools - transportation, clothing & food for the specific festival or new school uniforms, books & other equipments </li></ul><ul><li>expenses during school holiday may increase with holiday tour </li></ul>
  16. 16. Budget (cont.) <ul><li>Expenses that exceeded the spending plan will result in either the savings reduced or the use of credit increased </li></ul><ul><li>Expenses that exceeded income resulted in the use of credit, the use of cash advance from credit card or borrowing from friends </li></ul><ul><li>Together with the spending plan or budget, need a list for sources of income, a list of expenses for each item & for each transaction occurred and also a table for achievement of short-term & long-term financial goals </li></ul>
  17. 17. Budgeting Problems <ul><li>Past mistakes </li></ul><ul><li>Mistakes such as large department store bills or high payments for non-essentials eg. car accessories would jeopardise the budget </li></ul><ul><li>Rectifying the errors from previous expenses can help to ensure the success of the new budget </li></ul><ul><li>When the budget is finally started, it will be a spending pattern that is more consistent with spending plans not as a spending pattern like before </li></ul>
  18. 18. Budgeting Problems (cont.) <ul><li>Car payments </li></ul><ul><li>When car payments were completed somewhere in the middle of the year, you should make provisions before the year started to save an amount equal to the payments </li></ul><ul><li>Some people might simply increased the spending in other areas </li></ul><ul><li>The saved amount from the supposed car repayment can help to increase usage of cash in the next car purchasing & lessen the car loan, thus reducing extra expense from loan interest </li></ul>
  19. 19. Budgeting Problems (cont.) <ul><li>Two incomes </li></ul><ul><li>The danger of two incomes is in getting used to living on two salaries </li></ul><ul><li>Do not become dependent on the second income </li></ul><ul><li>Budget only the primary income for routine living expenses </li></ul><ul><li>The second income should be used for non-regular expenses such as for vacation or eating out frequently and also for savings & building wealth </li></ul><ul><li>If the second income is used for normal expenses, if it stops, the normal expenses has to be reduced & this will be difficult </li></ul>
  20. 20. Budgeting Problems (cont.) <ul><li>Joint effort </li></ul><ul><li>Budget should be a family effort </li></ul><ul><li>In younger family, it involve both husband & wife </li></ul><ul><li>If it is not a joint effort, there is little chance that it will succeed </li></ul><ul><li>In older families, other than the husband & wife, children should involved in the budgeting process as they are also spending part of the family income </li></ul><ul><li>The budget is only a visible evidence that shows a family wants to control the way it spends money </li></ul><ul><li>Full cooperation of family members are needed to make the budget work </li></ul>