pay attention like your life depends on this information

Pay attention like your life depends on this information.

Life Lessons 101

BudgetingOverview

How do you want life to be?Do you want to:

Enjoy life?

Struggle?

Everybody wants to be rich.

How badly do you want this?

Where does one

begin?

What is a Budget?

• A plan for spending and saving money

• Most people think

budgets are:– Rigid and inflexible

– Painful – who wants to

eat Top Ramen every

night!

– No fun!

A budget does not take the fun out of having and making money

Why Budgets Make Sense

• Budgets help you:– Set priorities

– Achieve what’s

important to you

• A good budget is:– Realistic– Ongoing– Clear and easy to

use

Budget Categories

• Income– Gross– Net

• Savings– Emergencies– Long-Term– Retirement– Short-Term

• Expenses– Fixed (can’t change)– Variable (may change)– Discretionary (for fun)

Income: Money Earned

• Gross income: An individual’s income before taxes.

• Net income: Income after taxes are paid.

• Taxes can range from 15% to 31%.

Taxes and Deductions

• First job pays $30,000/year. • Your salary is your gross income. Take off at least 25% for taxes

and other deductions. That’s what’s left for you to spend.• Example:

Gross salary = $30,000.00Minus 25% taxes and deductions - 7,500.00Net income $22,500.00Net monthly income (take home) $ 1,875.00

Savings: Pay Yourself First

• Savings: unspent income• Types

– Emergencies: Plan to set aside a minimum of three months’ living expenses

– Long-term: Large ticket items (house, car, college)

– Retirement: It’s never to early to start

– Short-term: Vacation, clothes, new toys

Personal Savings Rate Declining

• 1974 to 1984– 10%

• 1985-1994– Fell to 5%

• 2004– 1.8%

• 2005– -0.5%

• 2006– -0.2%

• Hasn’t been negative since the Great Depression

Personal Savings Rate Declining

• Currently about 3 to 4% on average

Why was it 8 -10% in the 1960s, 70s, & 80s

Start Saving Young!

• Save $2,000 per year from age 19 – 26– $1,035,148 by age 65

• Save $2,000 per year from age 27 – 65– $805,185 by age 65

• Time value of money– Invest fewer dollars at

a younger age but have 25% more

Or . . .

Save $2,000 per year from age 19 – 39

How much might you have when you decide to retire at age 40?

$1,518,745

Who wants to be able to retire at 40 a millionaire?

So, what’s the problem?

• By age 26 you will have accrued over $25,000.00

• Can you now “sit” on that money until it is time to retire?

• That’s usually the problem.

What if you want to wait and retire at 55. How much might you have?

Start Saving Young!

• Save $50 per month from age 19 – 26– $665,000 by age 65

• Save $25 per month from age 20 – 55

– Over 98,000 by 55

Income: Money Earned

• Gross income: An individual’s income before taxes.

• Net income: Income after taxes are paid.

• Taxes can range from 15% to 31%.

Back to the Budget

Expenses

• Expense: A cost to meet a need or pay a debt

• Types of expenses– Fixed– Variable– Discretionary

Needs vs. Wants

• Needs are essentials– Food– Shelter– Clothing– Transportation

• Wants are extras– Dining with friends– Big, expensive house– Shop till you drop– Brand-new or expensive car

– Cell Phone

Fixed Expenses

A cost that occurs regularly and doesn’t vary in amount

– Rent

– Mortgage

– Car payment

– Insurance premium

– Internet

– Cable/satellite

– Others?

Variable Expenses

A cost that occurs regularly but may vary in amount:

– Electricity

– Water and Garbage

– Telephone

– Gasoline

– Groceries

– Cell Phone

– Others?

Discretionary Expenses

A cost determined by personal wants that may be controlled

– Movies, videos, CDs

– Sports

– Dining out

– Grooming and clothes

– Vacations

– Others?

Wants, not Needs

Budget Summary

• Establish a budget:

– Income

– Savings

– Expenses

• Fixed

• Variable

• Discretionary

• End up with a budget

surplus and you’re a

success!

Bottom Line . . .

Enjoy your life

Budget your life

Example:

NET INCOME

EXPENSES Fixed Rent Car Payment Car Insurance Cell Phone Internet Cable Savings OtherSubTotal Variable Electricity Fuel Water Trash Groceries Entertainment Other SubTotalTotal Expenses

Difference NI - E

Monthly Budget

____________ (NI)

____________________________________________________________________________________________________________

________________________________________________________________________________________________________________________ (E)

____________

Month __________

Example:

NET INCOME

EXPENSES Fixed Rent Car Payment Car Insurance Cell Phone Internet Cable Savings Other Sub Total

Variable Electricity Fuel Water Trash Groceries Entertainment Other Sub TotalTotal ExpensesDifference NI - E

Monthly Budget

____________ (NI)

____________________________________________________________________________________________________________

________________________________________________________________________________________________________________________ (E)____________

Month __________

John is a twenty-year-old working as an assistant store manager at McDonald’s. He is not married, has no dependents.He is on a salary of $32,841.00 That equates to about $631.57 per week or $2736.75 per month.

What is John’s monthly net income approximately?About $2150.00 based on current tax rates.

Now, how would you make this budget look?

First things first . . .

Where might he, or you, live?

Average monthly rent for a one-bedroom apartment

City Rent

San Antonio $ 749.00

San Diego $ 1449.00

Seattle $ 1525.00

Los Angeles $ 1740.00

Boston $ 2965.00

New York $ 3000.00

Washington DC $ 2190.00

City Rent

Columbus, OH $ 722.00

Arlington, TX $ 713.00

Memphis, TN $ 692.00

Detroit, MI $ 678.00

Tucson, AZ $ 628.00

Wichita, KS $ 620.00

Tulsa, OK $ 672.00

What might he, or you, drive?

Average monthly car payment

Amount Financed Monthly Payment 5 years

$50,000 $950.00

$40,000 $760.00

$30,000 $570.00

$20,000 $380.00

$15,000 $285.00

Plus insurance $75.00 - $150.00 per month

Let’s finish the Budget

Consider what the following items might cost John, or you, on a monthly basis:

Cell phone, Internet, cable/satellite

Gas and maintenance for your car

Groceries from HEB

That new computer you want that you need to be saving for

Utilities like electricity, gas, water, trash

Money you will spend just hanging out with your friends

Clothes, cosmetics, and all that stuff

Example:

NET INCOME

EXPENSES Fixed Rent Car Payment Car Insurance Cell Phone Internet Cable Savings Other Sub Total

Variable Electricity Fuel Water Trash Groceries Entertainment Other Sub TotalTotal ExpensesDifference NI - E

Monthly Budget

____________ (NI)

____________________________________________________________________________________________________________

________________________________________________________________________________________________________________________ (E)____________

Month __________

So, John is a twenty-year-old working as an assistant store manager at McDonald’s. He is not married, has no dependents.

About $2150.00 based on current tax rates.

You are “John,” how would you make this budget look?

Example:

NET INCOME

EXPENSES Fixed Rent Car Payment Car Insurance Cell Phone Internet Cable Savings Other Sub Total

Variable Electricity Fuel Water Trash Groceries Entertainment Other Sub TotalTotal ExpensesDifference NI - E

Monthly Budget Month __May____

$2150 (NI)

750.00250.00100.00100.00 75.00 85.00 50.00 20.001430.00

65.00200.00 30.00 25.00200.00100.00 35.00 655.002085.00 (E) +65.00

Your turn: