Smart InvestingEmmet O’Neal LibraryMountain Brook, AL
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.
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
Financial Goals• Be realistic• Be specific• Have a time frame• Include a dollar amount• State the action to be taken• Set milestones
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
Constraints• Obstacles in the way of the pursuit of the financial
goal• Personal• Economic• Governmental• “Expect the unexpected”
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
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
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%
Sample Pay Stub
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%
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
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%
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)%
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
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
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
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
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