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Budgeting

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Budgeting

  1. 1. Module #2 Budgeting Teacher’s Guide Table of Contents I. Learning objectives II. Chart: The budget pie III. Script and slides for lesson on budgeting IV. Budget worksheets V. Case studies 0 | Playbookk for Life Teacher’s Guide: Budgeting
  2. 2. Introduction The Playbook for Life is a national educational program created by The Hartford Financial Services Group, Inc. to help student-athletes and young adults gain a solid understanding of personal finance. The program was developed as part of The Hartford’s philanthropic focus on education and its corporate partnership with the National Collegiate Athletic Association (NCAA). Since its launch in March 2005, the Playbook for Life has been widely praised by coaches, teachers and parents as a valuable resource for college students and young adults interested in getting a head start on their financial future. The guidebook and Web site, available at www.playbook.thehartford.com, contain practical, easy-to-use information on personal finance basics, such as budgeting, managing credit and debt, understanding job benefits, and realizing the importance of saving and investing. The program has been presented at many colleges and universities across the United States, and the materials are available to students everywhere. This Playbook for Life Teacher’s Guide was developed in direct response to feedback from educators and NCAA CHAMPS/Life Skills Coordinators, many of whom had expressed interest in utilizing the Playbook for Life program with their student- athletes. This guide and presentation slides are designed to be used with the Playbook for Life guidebook, copies of which can be downloaded or ordered free at www.playbook.thehartford.com. The Hartford is pleased to make this resource available to teachers, coaches, advisors and others who are helping students learn important life skills. As with the Playbook for Life guidebook, these materials are designed to provide general information and should not be construed as specific financial, tax, legal or accounting advice. Students should consult a qualified advisor in these matters. (Please see the back cover of the Playbook for Life guidebook for more detail). A special thanks to Dr. Susan Coleman, Ansley Professor of Finance at the University of Hartford, for her assistance in developing this lesson on budgeting. This teaching module is designed as a follow-on unit to the Playbook for Life overview presentation. We welcome your feedback regarding the Playbook for Life program and how these teaching tools have worked for you. Your input is invaluable as we continually strive to enhance and refine the program. Please contact us with your comments at playbookforlife@thehartford.com. 1 | Playbookk for Life Teacher’s Guide: Budgeting
  3. 3. Table of Contents I. Learning objectives....................................................... 3 II. Script and slides........................................................... 4 III. Budget worksheets...................................................... 25 IV. Case studies............................................................... 26 V. Web sites................................................................... 29 VI. Evaluation form.......................................................... 30 2 | Playbookk for Life Teacher’s Guide: Budgeting
  4. 4. I. Learning Objectives: • Students will learn the importance of evaluating their current situation before starting the budgeting process. • Students will gain an understanding of the link between personal goals and the budget. • Students will establish a personal budget that includes major income and expense items. • Students will learn to track their budget on a monthly basis by comparing budgeted items to actual income and expenses. • Students will learn alternate budgeting strategies that will allow them to achieve their goals. • Students will learn the importance of communicating priorities to individuals who may be affected by their spending behavior. 3 | Playbookk for Life Teacher’s Guide: Budgeting
  5. 5. II. Script and Slides for Lesson on Budgeting 4 | Playbookk for Life Teacher’s Guide: Budgeting
  6. 6. Slide 1: Introduction In the Playbook for Life overview presentation, you were introduced to some of the major financial issues that you will likely face within the next few years. One of those topics was “Budgeting” – the focus of our program today. Your budget is your financial roadmap, and it should reflect your financial circumstances as well as your goals and priorities. As indicated in more detail on the back cover of your Playbook, this presentation is designed to provide general information about various personal finance topics, and so, of course, it has some limitations as described there. Among other things, please note that you should consult a qualified advisor for individual guidance on any of the topics covered. 5 | Playbookk for Life Teacher’s Guide: Budgeting
  7. 7. Slide 2: The budgeting process Let’s look at the steps in the budgeting process: • First, evaluate your current situation. Are you employed or do you expect to be, and what will be your income and expenses? • Second, establish goals and priorities, both short-term and long-term. An example of a short-term priority might be getting and apartment or buying a car. Longer-term priorities include getting a graduate degree, buying a house, or starting a family. • Third, construct an annual budget – month by month – that realistically reflects your income and expenses. • Fourth, use this budget to track your actual income and expenses against the budgeted amounts. • Fifth, if there is a variance, you may need to adjust your budget and, possibly, your goals. • Finally, when your budget is completed, communicate your priorities to “significant others” such as parents, girlfriends, boyfriends, spouses, partners, or roommates. Your priorities will reflect what you are willing to spend money on – something the people you are close to you should know. Misunderstandings about money can cause a lot of problems in inter-personal relationships, so it’s best to be very clear about what your priorities are right up front. 6 | Playbookk for Life Teacher’s Guide: Budgeting
  8. 8. Slide 3: Evaluating your current situation As we discussed earlier, the first step in the budgeting process is to evaluate your current situation. Let’s start with possible sources of income: • Are you employed full-time or do you expect to be? • What do you anticipate your annual salary to be? • Do you expect additional compensation for bonuses, commissions, or working overtime? On the expense side, what are your existing financial obligations? • Do you have student loans? • Do you have car loans? • Do you have credit card debt? What other factors may affect your budget? • Will you be living in a city or a more rural area? • Will you be close to your family or will you have to travel to see them? • Do you plan to start a graduate degree in the near future? • Are you getting married within the next couple of years? 7 | Playbookk for Life Teacher’s Guide: Budgeting
  9. 9. Slide 4: Establishing your goals and priorities As you construct your budget, you will also need to establish goals and priorities, both short-term and long-term. Short-term goals are those goals that you expect to achieve within the next year, while longer-term goals are those that will take longer than one year to achieve. Your budget should realistically reflect your current situation and should provide a means for achieving both your short-term and longer-term goals. For example, if one of your short-term goals is to buy a car, your budget should include car payments, insurance, repairs and maintenance, and property taxes as expense items. 8 | Playbookk for Life Teacher’s Guide: Budgeting
  10. 10. Slide 5: Determining your short-term goals Let’s think of some typical examples of short-term goals. • You’ll obviously want to get a job. If you don’t, the income section of your budget will probably look pretty bare. • Do you want to live in a particular location – perhaps a city with a vibrant social scene, or maybe near your family? • You’ll need to find a place to live, typically an apartment. • You may need to buy a car, if your job is not in an area that has good public transportation. • And you may have some recreational goals like taking a vacation, joining a gym, or traveling. 9 | Playbookk for Life Teacher’s Guide: Budgeting
  11. 11. Slide 6: Determining your long-term goals What are some typical examples of longer-term goals – those that will take longer than a year to accomplish? • You may want to start working on a graduate degree, law school, or medical school. • You may also plan to get married and have a family at some point in the future. • You’ll ultimately want to consider buying a house or condo. • If you do have a family, you will find yourself saving for college for your children. • And although this seems a long way off, you will want to prepare and save for retirement. And believe me, you don’t want to wait until you’re 50 to do that! 10 | Playbookk for Life Teacher’s Guide: Budgeting
  12. 12. Slide 7: Constructing a personal budget When you have evaluated your personal situation and formulated your short-term and longer-term goals, you are ready to sit down and begin constructing your personal budget. Typically, the budget is done on a monthly basis. You will have one column for your budgeted income and expense items, and a second for your actual income and expenses. This will allow you to track variances on a monthly basis, which is important. You don’t want to wait until the end of the year to discover that you are seriously off budget. 11 | Playbookk for Life Teacher’s Guide: Budgeting
  13. 13. Slide 8: Using a budget worksheet We’ve created a sample budget to show you how each dollar of a salary might be spent and why it is so important to track. • Salary: $35,000 • Location: New Haven, Connecticut • Housing: Apartment with three roommates • Transportation: Used car, commute 10 miles to work There are a lot of individual items on the budget worksheet, but let’s take a closer look at a few of them: • When starting out, sharing an apartment can reduce housing and utility costs. • A great way to save money is to bring your lunch instead of eating out. • Even if your employer provides health insurance, you still might have to pay a small portion each month. • Don’t forget to pay yourself. • Start saving for retirement now – it will pay off in the long run. • Pay your student loans on time to establish a good credit history. • Remember to budget for taxes. 12 | Playbookk for Life Teacher’s Guide: Budgeting
  14. 14. Slide 9: Sources of income Let’s talk about some of the income and expense items that should be included in your budget, starting with sources of income. • The most obvious source is earnings from your job, but make sure you base your income on your take-home pay rather than your salary. Take-home pay is your salary minus taxes, health insurance premiums, and 401(k) contributions. That’s what you actually have available to spend. • Another source of income might be bonuses or commissions, particularly if you work in some type of sales position. These may not be paid every week or month, but are often paid only once a year, based on the company’s earnings. • If you have stock or bond investments you may have dividend or interest income. These, too, will be paid at less frequent intervals. Dividends, for example, are paid quarterly. • Alimony and child support payments are additional sources of income. • And, if you’re lucky, you may receive financial gifts from your parents, grandparents, or other relatives. 13 | Playbookk for Life Teacher’s Guide: Budgeting
  15. 15. Slide 10: Your major expenses Now let’s list some of your major expense categories: • The most obvious is taxes and Social Security, which will have been taken out before you even get your paycheck. If you own a car or house, however, you may have to pay property taxes to the state or town you live in. • Health insurance. Even if your employer provides coverage, you will likely pay some portion of the premium. That, too, is usually taken out before you get your paycheck. • Housing is a major expense, and you will need to decide whether to rent an apartment, buy a condo, or perhaps live with your parents. Depending on your choice, you may have additional expenses in the form of utilities, cable, heat, water, cell phone, Internet service, etc. • Where you live will help determine your transportation needs. If you are in an urban area, you may have the option of public transportation, and will have to buy a train or bus pass. If you live in a more suburban or rural area, you will likely have to buy a car, along with insurance, gas, and possibly property taxes. • Retirement savings should be a priority for you – even in your 20’s. Although it is listed as an expense category, saving for retirement is really an investment in your future. If you participate in your company’s 401(k) plan, that contribution will have been taken out before you get your paycheck. You may also want to allocate additional savings to an Individual Retirement Account (IRA), mutual funds, CD’s, or individual stocks and bonds. 14 | Playbookk for Life Teacher’s Guide: Budgeting
  16. 16. • Education expenses in the form of student loan payments and/or expenses that will help you to advance your career or possibly change careers. If you decide to go back to school for another degree, you may have expenses for tuition, books, and sometimes travel to school. Sometimes your employer will pay all or part of these expenses, but that doesn’t always happen. • Food, travel and entertainment. 15 | Playbookk for Life Teacher’s Guide: Budgeting
  17. 17. Slide 11: Discretionary expenses Many of the expenses we just discussed relate to necessities, but there are also a number of expenses that are much more discretionary in nature such as food, clothing, and recreation. • Do you plan to cook at home or eat out a lot? • Does your job require a professional wardrobe, or can you dress more casually? (Don’t forget, dry cleaning and laundry bills add up.) • Do you like to go out at night a lot with your friends, or do you prefer to stay home with a video or a good book? As you construct your budget, you may find that you have to make some compromises in these discretionary areas, particularly if you tend to do a lot of spending. 16 | Playbookk for Life Teacher’s Guide: Budgeting
  18. 18. Slide 12: The budget breakdown What expenses might a 25-year-old expect to have? Let’s take a look at this chart. If you get a job with a starting salary of $35,000, your expenses may be: • 19 percent for taxes • 8 percent for Social Security and Medicare • 25 percent for rent • 14 percent for transportation • 10 percent for utilities • 6 percent for costs associated with health and dental insurance • 5 percent for savings That leaves 13 percent for everything else: food, clothing, entertainment, travel, and other activities, that’s about $380 a month. 17 | Playbookk for Life Teacher’s Guide: Budgeting
  19. 19. Slide 13: Fixed versus variable expenses Before we leave the topic of expenses, let’s touch on fixed versus variable expenses. A fixed expense is one that remains the same every month or every year. Examples include rent, car payments, gym membership, insurance payments, and some utilities. In contrast, variable expenses are those that vary depending on usage. Examples of these might include groceries, eating out, clothing, entertainment, and travel. As we mentioned earlier, you are likely to have somewhat more control over variable expenses than you do over fixed expenses. Therefore, if you find you are exceeding your budget in one area, you can look at your variable expenses for ways to cut back – at least temporarily – elsewhere. We all do that. If we spend too much money on holiday gifts in December, we may opt not to eat out at restaurants in January and February to make up for it. 18 | Playbookk for Life Teacher’s Guide: Budgeting
  20. 20. Slide 14: Balancing out the budget year As you construct your budget, remember that some of your income and expense items may not occur every month. For example, if you get an annual bonus, it may come in January to reflect your work for the prior year. As we noted earlier, dividend income is typically paid out quarterly, and bond interest, semi-annually. The same is true of expense items. Property taxes on a car are paid once a year while property taxes on a house are paid twice a year. Car insurance can be paid annually or broken down into monthly or quarterly installments. Make sure that your monthly budgets reflect the timing of the non-monthly income and expense items. In other words, don’t forget them just because they don’t occur every month. 19 | Playbookk for Life Teacher’s Guide: Budgeting
  21. 21. Slide 15: Making ends meet When you begin working fulltime, you will probably find that you’ll want or need more things than you have income to pay for. That’s unfortunately the way it works for most of us. So, how can you stretch your budget dollars? You can make your money go farther by either increasing your income or reducing your expenses. For example, you might take a part-time job a couple of nights a week or on the weekend. Alternately, if your job gives you summers off, you might take on another summer job. To reduce expenses, you could live at home for a few years or share living expenses with a roommate. You could car pool to work or take public transportation, if it’s available; you’d save money either way. 20 | Playbookk for Life Teacher’s Guide: Budgeting
  22. 22. Slide 16: Being over and under budget Your actual income and expenses do not always equal your budgeted income and expenses. That is called a budget variance, and it can be either good or bad. A good variance is when you budget for a salary of $35,000 and your boss gives you a 5 percent raise in the middle of the year. Or, if you budget $200 a month for gas and discover that you can cut that in half by car-pooling. Unfortunately there are also bad budget variances. You might budget $1,000 for medical expenses for the year and discover that you need to have a root canal. If you don’t have dental insurance, there goes your entire $1,000 and then some. Bad variances can also occur when you don’t pay enough attention to how you are spending money. This happens pretty often with credit card bills that come in twice as high as expected because you charged a lot of meals, clothes, and entertainment. That’s why it’s important to do your budget on a monthly rather than an annual basis, so if you are faced with a negative variance, you can take corrective action to get your budget back on track. In this example, you budget $1,000 for a vacation, but actually overspend by $500. It’s easy to do on vacation if you are eating out or buying souvenirs and gifts. Again, if that happens, you need to cut back somewhere else or find a way to earn the extra income. 21 | Playbookk for Life Teacher’s Guide: Budgeting
  23. 23. Slide 17: Avoid the credit card trap What about just charging those bad budget variances to your credit card? Bad idea! If you get into that habit, you will not only move farther and farther away from your budget, but you will also eventually get buried under a pile of credit card debt, which will add to your monthly expenses. Budgeting involves some qualities that you, as students, should understand; discipline and the ability to set priorities. You need to bring those same qualities to bear in managing the financial side of your life. 22 | Playbookk for Life Teacher’s Guide: Budgeting
  24. 24. Slide 18: Sharing your budget strategies After you have established your goals and developed a budget to meet those goals, it’s important to communicate your priorities and budget strategies to your significant others. They may include your parents if you still live with them, your roommates if you share an apartment, friends with whom you spend a lot of time and money, and eventually, your spouse or partner. Misunderstandings about money and financial priorities are a common source of friction in interpersonal relationships, so it is important to communicate clearly and often. 23 | Playbookk for Life Teacher’s Guide: Budgeting
  25. 25. Slide 19: Life changes affect the bottom line Finally, you should re-evaluate your goals and budget at regular intervals. You will need to do a new monthly budget each year, and that’s a good time to review the prior year’s budget and actual income and expenses to see if you were on target. If you had a lot of big variances, you’ll want to understand why, so you can create a more realistic budget going forward. Over the course of your life, your goals, life situation, income and expenses will likely change. You may change careers, which could lead to a higher or lower income. You may get married, which may affect both your income and expenses. And, you may have children, which will certainly affect your expenses. Because of these life changes, as well as unexpected events, good and bad, you will need to re-visit your budget at least annually to ensure that it continues to reflect your situation and priorities. 24 | Playbookk for Life Teacher’s Guide: Budgeting
  26. 26. III. Budget Worksheets 25 | Playbookk for Life Teacher’s Guide: Budgeting
  27. 27. IV. Case Studies Mini-case #1: Erica When Erica, a soccer player at (school) graduated in May of 2006 with a degree in marketing, her dream was to work for a major marketing firm in New York City. She had visited New York as a child for family outings to Radio City, Rockefeller Center, and the Metropolitan Museum of Art, and was enthralled by the city’s energy and its many cultural attractions. Fortunately, a (school) alumnus had some contacts in New York and was able to help Erica secure an interview with a major firm. Impressed with her academic record and the commitment required to be a student- athlete, the firm hired her at a starting salary of $50,000. As a part of her compensation package, Erica received two weeks of paid vacation each year and health and dental insurance; her employee contribution was $100 per month. The company also offered a 401(k) retirement savings program and would match Erica’s contributions up to 5 percent of her salary. In addition, the company would cover the cost of tuition and books for a graduate degree. Having secured the job of her dreams, Erica now had to decide where to live. She really wanted an apartment in New York in order to take advantage of the city’s activities after work and on weekends. At the same time, she recognized that rents in New York were very expensive, and would consume a sizeable chunk of her take- home pay. After doing some research, Erica found that she could get a one-bedroom apartment in Manhattan for $2,000 per month. The same apartment would cost her $1,000 in Brooklyn, a 30-minute commute by train. Alternately, if Erica was willing to have a roommate, she could get a two-bedroom apartment in Manhattan for $3,000. 1. What income and expense items should be included in Erica’s monthly budget? 2. Use the following additional information to construct a monthly budget for Erica for each of the 3 apartment alternatives: a. Taxes are 30 percent of her gross income b. Utilities (heat, gas, water, cable, phone) are 30 percent of her monthly rent c. If Erica decides to live in Brooklyn, she can get a train pass for $150 per month d. After graduation Erica needs to start paying off her college loans at the rate of $200 per month 3. Which of the three housing alternatives is “the best?” What benefits would Erica gain by selecting this alternative over the others? What might be some possible disadvantages in selecting this alternative? 4. Can you think of any other alternatives that Erica might pursue to either a) increase her income, or b) reduce her expenses? 26 | Playbookk for Life Teacher’s Guide: Budgeting
  28. 28. Mini-case #2: Adam Adam graduated from (school) in May of 2006 with a degree in education. After playing basketball for four years for (school team), he felt fortunate to secure a coaching position at an area high school where the long-time coach was retiring after a 35-year career. As Adam prepared to begin his coaching career, he realized that he had a lot of choices ahead of him aside from the obvious ones of selecting his team and developing a playbook. Adam’s starting salary at his new position would be $35,000 with the opportunity for additional earnings if he ran a summer basketball camp. Assuming 27 percent for taxes and Social Security, Adam’s take-home pay would be about $25,500. Since Adam would be working for a public school, his benefits package was excellent. He would have both health and dental coverage for only $50 per month, and he would also be covered by a pension. In spite of the pension coverage for retirement, his parents urged him to open an Individual Retirement Account (IRA) and put in at least $2,000 per year. According to the terms of his contract, Adam was expected to complete his Master’s degree within five years. The school district would pay for those courses as well. Adam still had to make some important decisions about living arrangements and transportation. The high school was in a relatively small town. He could rent an apartment there or in a neighboring town for about $700 per month. However, there wasn’t much of a social scene in town, and Adam wasn’t so sure that he wanted to live in the same town where he worked. So, he was considering moving to a larger city 25 miles from the high school where he would be teaching. That city had an active nightlife, and there were would be more opportunities to meet friends and socialize. Apartments there were more costly, ranging in price from $1,000 to $2,000 per month for a one-bedroom. He estimated that utilities (electricity, cable, internet access, phone) would be another $300 per month wherever he chose to live. Adam also needed to buy a car. As a student, he had been able to catch rides with friends, and he used his parents’ car when he went home for vacations. Those days were over. Given the amount of time that he would spend driving to scout games, Adam felt that he would need something with 4-wheel drive. He also needed something relatively spacious given his height and the height of his players. He decided on a sport utility vehicle with a sticker price of $28,000. His parents told him that they would give him $5,000 toward the purchase of a car as a graduation present. Since he had no savings to speak of, he would have to finance the balance of $23,000. After checking around, Adam found that he could get a new car loan for 7 percent to be paid over 5 years. That would give him monthly payments of $450. Car insurance would be another $2,000 per year, and Adam would also have to pay property tax on the car of $1,000. 1. What income and expense items should be included in Adam’s monthly budget? 2. Are there any additional sources of income or expenses that he may not have thought of? 3. What other alternatives does Adam have for finding a place to live and securing transportation? 27 | Playbookk for Life Teacher’s Guide: Budgeting
  29. 29. 4. How would your suggestions affect Adam’s monthly budget? 5. What do you think Adam should do? 6. What are the possible benefits and risks associated with your recommendation? 28 | Playbookk for Life Teacher’s Guide: Budgeting
  30. 30. V. Web sites: How many of you have referred to various Web sites for help in creating a budget? Let’s start a list. http://www.playbook.thehartford.com http://www.money.cnn.com http://finance.yahoo.com http://www.fool.com http://www.kiplinger.com http://www.frugalliving.com The Internet addresses of other companies’ websites are provided for users’ convenience only. The Hartford Financial Services Group, Inc. and its affiliated companies (collectively, “The Hartford”) do not control or review the listed sites or any content appearing on the sites, nor does the provision of any address imply an endorsement or association of non-Hartford websites. The Hartford is not responsible for, makes no representation or warranty regarding, and does not endorse, certify, approve, or warrant the quality, reliability, or performance of any goods or services associated with, used in, marketed through, made available through, or provided through the listed sites, or the contents, completeness, accuracy, or security of any materials on such sites. If you decide to access such non-Hartford sites, you do so at your own risk and Hartford shall not be liable for any damages, losses or liabilities of any kind or nature related to or arising out of any content on the listed site. 29 | Playbookk for Life Teacher’s Guide: Budgeting
  31. 31. Playbook for Life Instructor’s Evaluation Form Module #2: Budgeting How useful did you find the teaching module on Budgeting? Maybe Very useful Somewhat useful Not at all useful Was it clear and easy for you to follow? Yes No Did the students appear to understand the material? Yes No How would you rate their reaction to the presentation? Very interested Somewhat interested Not at all interested What was the average age of your audience? Freshman Sophomore Junior Senior/Fifth-year student Was the content age-appropriate for the audience? Yes No Which specific topics elicited the most interest? (Check those that apply.) Identifying goals Constructing a budget The budget breakdown Budget variances The credit card trap Other On what topics did they ask the most questions? At the end of the session, did the students appear to understand how to complete the budget worksheet? Yes No Did not do it 30 | Playbookk for Life Teacher’s Guide: Budgeting
  32. 32. Did you use one or both of the mini-case studies? Yes No If yes, how would you rate student engagement and participation? Very good Good Fair Poor What additional information do you think should be included in this module? Do you believe the stated learning objectives were met? Yes No Unsure Would you use these materials again with a second group of students? Yes No If no, why not? Would you recommend these materials to a colleague? Yes No If no, why not? Do you plan to present any of the other available modules? Yes No Maybe Any additional suggestions on how the Budgeting module can be improved? # of students in session _______________ Thank you for your feedback on these materials. It is invaluable to us in our efforts to continually enhance and improve the various components of the Playbook for Life program. Please return this evaluation form to: Pamela Rekow Corporate Relations T-12-56 The Hartford Financial Services Group 690 Asylum Avenue 31 | Playbookk for Life Teacher’s Guide: Budgeting
  33. 33. Hartford, CT 06115 Fax: 860-757-1686 pamela.rekow@thehartford.com 32 | Playbookk for Life Teacher’s Guide: Budgeting

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