Money Matters, Class 2: Budgets


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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.

Published in: Economy & Finance, Technology
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  • Budget What is budget? A budget ( spending plan ) is simply a plan showing how you plan to spend your money ( net income ) and meet your financial goals. When making spending plan always use net income to predict how much money you will have to spend. What do I need to prepare a budget? List of income and expenses, including debt payments Start by writing down all your income and expenses for a month. Be realistic about your income and expenses. Knowing the actual numbers will help you make the best choices to meet your financial goals. When you create a budget, you begin to see a clear picture of how much money you have, what you spend it on, and how much, if any is left over.
  • 3. If you have money left over, think about how that money could be used. Getting debt under control is important. Put the extra to work on decreasing debt or other GOOD use. If you’re spending all your income or even more, your budget can show you areas where you might be able to change your spending.
  • Once a budget is constructed and the proper amounts are allocated to their proper categories, the focus for personal budgeting turns to the following the budget. One simple way for following a budget is the Envelope System. The Envelope System is a method of budgeting where on a regular basis a certain amount of money is set aside for a specific category or purpose, in an envelope marked for that purpose. When you get paid you withdraw enough cash for those categories you plan to pay in cash, such as groceries, gas, eating-out, childcare, clothing, entertainment, etc. You fill your envelope with the amount for each category, such as $200 for groceries. Then anytime you make a purchase you look in the envelope see if there is enough money to make the purchase. If there is, all is well. Otherwise you have three options: 1) you don’t make the purchase; 2) you wait until you can put more money into the envelope; 3) you take money from another category by moving money from that envelope. If you don’t spend everything in your envelope this month, you have three choices: 1) the extra money stays in the envelope and gives you more money to spend in that category next month; 2) you move the extra money to a another category where you need it or plan to spend more next month; 3) you take the extra money and put into your savings account. Budget down to the last dime all where all money will be spend before the month begins. Categories such as food, gas, clothing and entertainment Categorize your cash expenses and fill each envelope with the money allotted for it in the budge When the money is gone you are done spending in that category. While debit cards can’t get you into debt they can cause you to over-spend. There’s something psychological about spending cash that hurts more than swiping a piece of plastic It will take a few months to perfect your budget and envelope system. Don’t give up. Designate a fun envelope and determine a preset amount each month that you can spend anyway you want.
  • Pay yourself first Save a dollar a day plus change Put tax refunds, bonuses and raises in the emergency fund until fully funded Work overtime or get a second job
  • Save change
  • The longer you compound interest, the larger the difference between the simple interest total and the compounded total
  • The example shows compounding once per year. The more often interest compounds, the faster your earnings accumulate. Common compounding rates: daily, monthly, quarterly, annually
  • Money Matters, Class 2: Budgets

    1. 1. Money Matters class 2
    2. 2. What is a Budget?A budget is anestimate of expected income andexpenses for a given period in thefuture
    3. 3. Why Prepare a Budget? A budget is a tool to help you understand where your money goes. A budget allows you to decide how much and when you spend your income. A budget allows you to make and reach your financial goals. A budget is the cornerstone of a solid financial future.
    4. 4. “Budgets are all about financial freedom. Without a plan for saving and spending, you’ll never make the most of your income – no matter how much money you earn.“Budgets are very empowering”“Budgets create financial security”“They don’t lead you away from something, they lead you toward your financial goals”
    5. 5. Tools for Making a BudgetOption 1 - Pencil, Paper and calculatorOption 2 - Spreadsheet Software  Microsoft Excel, i Work NumbersOption 3 - Money Management Software  QuickenOption 4 - Spending Management Software Online  YNAB – You Need A Budget 
    6. 6. BUDGETWhat do I need to prepare a budget?  List of income  List of expenses, including debt payments
    7. 7. Types of Expenses Fixed Expenses: remain the same each month Variable Expenses: vary from month to month Periodic Expense: Occur only once or twice a year
    8. 8. Fixed Expenses (amount Actual Notesstays the same each Expense month)Rent/MortgageHomeowners /Renters InsuranceCar PaymentCar InsuranceLoan #1Child SupportDay CareCable TVInternetTotal Fixed Expenses
    9. 9. Variable Expenses Budgeted Expense Actual ExpenseCredit CardElectricGasTelephoneCell PhoneWater / SewerGroceries (Food Only)Eating outHousehold / MiscTobacco / AlcoholGasolineBus / ParkingLaundromat / Dry CleaningBarber/Beauty ShopNewspapers / MagazinesAllowance/Spending MoneyRecreationPet Expenses  Church/Charity  Postage    Total Variable Expenses
    10. 10. Monthly Expenses Include those items that are paid periodically  Annual Car Tag - $144 / 12 = $12 per month  Quarterly Pest Control - $90 / 3 = $30 per month
    11. 11. Budgeted Expense Actual Expense Periodic ExpenseCar Repair/MaintenanceCar Tag/InspectionDoctor/DentistMedications/PrescriptionsClothing/ShoesHome Repair/MaintenanceGiftsTotal Periodic ExpensesTotal Monthly Income(+)Total Monthly Expense(-)Total Extra/ Shortfall(=)
    12. 12. Creating a Budget1. Identify your net monthly income2. Identify your monthly expenses3. Monthly Income – Monthly Expenses =  Income greater than expenses – savings $  Expenses greater than income – debt3. Balance your Budget!
    13. 13. Things to Keep in Mind1. Your budget should be tailored to YOUR needs and goals2. Be realistic3. Save for the unexpected. It can and will happen4. Involve the entire family5. Keep it simple6. Don’t panic if your expenses exceed your income
    14. 14. Evaluate and Reduce Spending1. Is this expense absolutely necessary?2. If not, can we do without it? • Is it a want or a need?1. If not, can you substantially reduce your spending? MONEY WORRIES... Make a Budget and Stick to IT!
    15. 15. Budget Bombs Cut out all the fun stuff Be hit or miss with savings Overuse debit card Pay only the minimums on cards Live without emergency savings Spend more than you earn
    16. 16. Envelope System1. Budget each paycheck2. Determine which categories you will pay in cash3. Fill’er Up4. Pay with cash and keep receipts5. When it’s gone, it’s gone6. Don’t be tempted by debit cards7. Give it time8. Have some FUN!
    17. 17. Setting Financial Goals People don’t plan to fail, they fail to plan People with a financial plan tend to:$ save more money$ feel better about their progress$ make better financial decisions, regardless of their income level.
    18. 18. Goal setting should be a family affair Short-term Goals (2 years or less) Mid-term Goals (within 2-5 years) Long-term Goals (5 years or more)Goal setting is a terrific motivator!
    19. 19. Examples Build an Emergency Fund Get your debt under control Save for a down payment on a car or home Save for retirement Save for something important to you or your family
    20. 20. Establishing an Emergency Fund 1st goal of every family should be to establish an emergency fund 3-6 months expenses The basics are rent (mortgage), heat, lights, phone, food and transportation to work Save each month until you reach your goal Keep the money in a safe easily available account Leave your emergency fund alone
    21. 21. SMART Specific – what you want to achieve and why Measurable – how much money will you need to save each month Attainable – when you want to achieve the goal Realistic – it can be achieved with the time and money available Trackable – specific time frame
    22. 22. AMOUNT EACHGOAL TYPE TIME AMOUNT MonthEmergencyFund Mid-term 2 years $2500.00 $104.00ChristmasGifts Short-term 12 months $600.00 $50.00DownPayment ona house Long-term 5 years $12,000.00 $200.00
    23. 23. Money Habits of Millionaires1. Millionaires buy used cars.2. Millionaires make their kids take out loans3. Millionaires do not see themselves as rich4. Millionaires do not all own vacation homes5. Millionaires tend to love what they do6. Millionaires believe in delayed gratification7. Millionaires track their money8. Millionaires don’t need to flaunt their wealth9. Millionaires shop with a list
    24. 24. Budget ExampleMonthly Income $Monthly Expenses Rent $ Savings $ Car Payment $ Utilities $ Phone $ Food $ Fun $ Clothes $ Miscellaneous $ Total Expenses $
    25. 25. Savings PlanSAVE, SAVE, SAVE Start now no matter how small your savings Pay yourself first, use automatic deductions Put your savings into a separate account that does not have ATM access Put any pay raises, bonuses or tax refunds into savings after you complete your emergency fund.
    26. 26. Simple InterestInterest Rate - the stated rate of interest paid each year$1,000 x 6% (.06) = $60 per yearValue after 12 years = 1,720$1,000 principal$ 720 interest earned ($60 x 12 years)$1,720
    27. 27. Compound InterestAPY YEAR 1 $1,000.00 $1,060.00 x x 6% 6% = = $ 60.00 $ 63.60(Annual percentage yield) 2 $1,123.60 x 6% = $ 67.42 3 $1,191.02 x 6% = $ 71.46 4 $1,262.48 x 6% = $ 75.75takes into account 5 $1,338.23 x 6% = $ 80.29the compounding 6 $1,418.52 x 6% = $ 85.11 7 $1,503.63 x 6% = $ 90.22effect of interest 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
    28. 28. The Rule of 72 – calculate how many years it will take for compounding to double your money at a specified interest rate. 72 / interest rate = years to double your money
    29. 29. For example, let’s say you have $1,000 and you want to know how long it will take to double your money @ 6% interest per year. 72 / 6 = 12 years $2,000If you deposited an additional $100 per year into your account you would reach $2,000 in just 6 years!
    30. 30. The magic of compounding interest is that you earn interest not only on the principal, but also on the interest you accumulate each year.
    31. 31. The Value of TimeMany people struggle to get from one paycheck to the next, but not saving now will hurt you later.$50 per month in a retirement account at 5% interest will be worth $21,000 in 20 years $42,000 in 30 years $76,000 in 40 years