• Explain budgeting strategies and their advantages and disadvantages
• Create a personal budget
• Identify factors that affect financial savings

The term budget is unpleasant to some people because it just looks like work. But who will care more about your money than you do? We all want to know if we have enough money to pay our bills, travel, get an education, buy a car, etc.

budget

A budget is a specific financial plan for a specified time, consisting of three elements: income, savings and investing, and expenses

 

Let’s explore some of the terms we just used a bit more.

Expenses

Expenses are the money spent on things that a person or a business needs. For example, as a college student, your expenses might include things like textbooks, tuition fees, transportation costs, and living expenses like food and housing. It’s important to keep track of your expenses so that you can make smart decisions about how you spend your money.

Expenses are categorized in two ways. One method separates them into fixed expenses and variable expenses. Rent, insurance costs, and home and car payments are fixed: they cost about the same every month and are predictable based on your arrangement with the provider. Variable expenses, on the other hand, change based on your priorities and available funds; they include groceries, restaurants, gas, clothing, and so on. You have a good degree of control over your variable expenses. You can begin organizing your expenses by categorizing each one as either fixed or variable.

fixed versus variable expenses

Fixed expenses are regular expenses that remain the same every month and are required for maintaining a certain standard of living.

 

Variable expenses are expenses that can fluctuate from month to month or are discretionary in nature.

A second way to categorize expenses is to identify them as either needs or wants. Your needs come first: food, basic clothing, safe housing, medical care, and water. Your wants come afterward, if you can afford them while sticking to a savings plan. Wants may include meals at a restaurant, designer clothes, video games, other forms of entertainment, or a new car. After you identify an item as a need or want, you must exercise self-control to avoid caving to your desire for too many wants.

List the last ten purchases you made, and place each of them in the category you think is correct (Fixed and Variable, or Need and Want).

Income

Income most often comes from our jobs in the form of a paper or electronic paycheck. When listing your income for your monthly budget, you should use your net pay, also called your disposable income. It is the only money you can use to pay bills. If you currently have a job, look at the pay stub or statement. You will find gross pay, then some money deducted for a variety of taxes, leaving a smaller amount—your net pay.

Sometimes you have the opportunity to have some other, optional deductions taken from your paycheck before you get your net pay. Examples of optional deductions include 401(k) or health insurance payments. You can change these amounts, but you should still use your net pay when considering your budget.

gross pay versus net pay

Gross pay is the larger paycheck amount that is listed on your pay stub prior to deductions for taxes.

 

Net pay is the smaller paycheck amount that remains after taxes and other deductions; this is the number you should use to plan a budget.

Some individuals receive disability income, social security income, investment income, alimony, child support, and other forms of payment on a regular basis. All of these go under income. During school, you may receive support from family that could be considered income. You may also receive scholarships, grants, or student loan money.

Savings and Investing

You have probably heard the phrase “The first person you should pay is yourself.” But, what does that really mean? This means you should set aside a certain amount of money for savings and investments, before paying bills and making discretionary, or optional, purchases.

Savings can be for an emergency fund or for short-term goals such as an education, a wedding, travel, or a car. Investing by putting your money into stocks, bonds, or real estate offers higher returns at a higher risk than money saved in a bank. Investments include retirement accounts that can be automatically funded with money deducted from your paycheck.

Automatic payroll deductions are an effective way to save money before you can get your hands on it. Setting saving as a priority assures that you will work to make the payment to yourself as hard as you work to make your car or housing payment. The money you pay toward saving or investing will earn you back your money, plus some interest.