budgets and budgeting

19
Smart Investing Emmet O’Neal Library Mountain Brook, AL Budgets and Budgeting

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Presentation used by Dr. Andreas Rauterkus at the Emmet O'Neal Library on October 6, 2011.

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Page 1: Budgets and budgeting

Smart InvestingEmmet O’Neal LibraryMountain Brook, AL

Budgets and Budgeting

Page 2: Budgets and budgeting

Disclaimer• Andreas Rauterkus is not a registered

investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Andreas Rauterkus does not purport to tell or suggest which investment securities attendants should buy or sell for themselves. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision.

Page 3: Budgets and budgeting

Objectives• What is a financial goal?• Learn how to track daily spending habits• Prepare personal spending plan• Estimate monthly income and expenses• Find ways to decrease spending and increase

income• Discover budgeting tools to help you manage your

money

Page 4: Budgets and budgeting

Financial Goals• Be realistic• Be specific• Have a time frame• Include a dollar amount• State the action to be taken• Set milestones

Page 5: Budgets and budgeting

Time Horizons• Short Term

– Financial activities that occur within the next year

• Medium Term– Can be anywhere from one to five years or even ten years– Generally, the “not-so distant” future

• Long Term– Far out in the future– E.g. retiring comfortably

Page 6: Budgets and budgeting

Constraints• Obstacles in the way of the pursuit of the financial

goal• Personal• Economic• Governmental• “Expect the unexpected”

Page 7: Budgets and budgeting

Develop a budget• Calculate your monthly income• Track you daily spending• Determine spending on monthly bills• Find ways to decrease spending and increase

income• Create a monthly budget

Page 8: Budgets and budgeting

Calculate Monthly Income• Gross versus Net Income

– Gross income – deductions = Net income

• Federal Income Tax Withholdings– Must complete Form W-4 to specify tax withholdings– If you do not fill out a form W-4 you will most likely overpay

on your taxes

Page 9: Budgets and budgeting
Page 10: Budgets and budgeting

Social Security and Medicare Taxes• Employers have to withhold social security and

Medicare taxes from your wages• Your wages up to a limit are subject to social

security taxes ($106,800 in 2011)• The rate is 4.2% • Max. contribution: $4,485.60• All of your wages are subject to Medicare tax• The rate is 1.45%

Page 11: Budgets and budgeting

Sample Pay Stub

Page 12: Budgets and budgeting

Tracking Daily Spending Habits• Track your expenses to avoid overspending• Try to keep spending within certain ranges for

specific categories• Housing expenses 30%• Household expenses 30%• Other bills 30%• Long-term savings 5%• Emergency savings 5%

Page 13: Budgets and budgeting

Create Spending Diary• Find out where your money goes

Daily Spending Diary

Item

Clothing

Entertainment

Food

Housing

Transportation

Total

Cha i Tea a t Sta rbuck's $ 4.50 $4.50

Bus fa re

$ 3.00

$3.00

Lun ch a t Subway $ 7.85 $7.85

Ma gazin e

$2.50

2.50

Ora n ge Puma 's $ 45.00 $45.00

Apa rtmen t Deposi t

$ 100.00

$100.00

TOTAL $ 45.00 $ - $ 12.35 $ 100.00 $ 3.00 $ 162.85

Page 14: Budgets and budgeting

Total Spending for the Week Category

Total

%

Clothi n g $ 470.00 73.57% En ter ta i n men t

$ 22.50

3.52%

Food $ 43.35 6.79% Housi n g

$ 100.00

15.65%

Tra n sporta ti on $ 3.00 0.47% TOTAL

$ 638.85

100.00%

Page 15: Budgets and budgeting

Item

Percentage of Net income

Guideline

Over/(Under)

Housing

15.65%

30%

(14.35)%

Household Expenses 84.35% 30% 54.35%

Other Bills

0.00%

30%

(30.00)%

Long-Term Savings 0.00% 5% (5.00)%

Emergency Savings

0.00%

5%

(5.00)%

Page 16: Budgets and budgeting

Determine Monthly Expenses• Expenses are items you spend money on each

month• Fixed expenses

– Do not change from month to month• E.g. car payments, car insurance, rent

• Variable expenses– Might change from month to month

• E.g. utilities, miscellaneous expenses

Page 17: Budgets and budgeting

Prepare a Budget• List your monthly income and expenses

• Net income needs to exceed expenses

• If not, go back and revise budget until you achieve a positive net income

Page 18: Budgets and budgeting

If you can’t pay your bills• Pay your rent and mortgage first

• Pay your necessary expenses next

• If you have trouble paying off your loans:– Pay off loans with the highest interest rates– Talk to your creditors

Page 19: Budgets and budgeting

Personal Financial Statement• Create a financial statement to track your financial

condition• A personal balance sheet is called a statement of

net worth• List all of your assets and liabilities• The difference between assets and liabilities is your

net worth• A negative net worth is not a sustainable financial

condition