Managing Your Income

Lesson Objectives
Identify the components of a budget.
Evaluate the relationship between budgets and goals.


Mickey wants to get his own apartment as soon as he graduates from high school. Mom
and Dad are not so sure. They know that money is tight at home, and they will not be
able to help him financially. They cannot afford any more expenses.

Mickey is convinced he can make it on his own. He has a part-time job during the school
year and can add more hours once he graduates.

His buddy Donald has already found a place to live, and his parents are okay with it. So,
Mickey cannot understand why his parents are giving him a hard time about moving out.

What can Mickey do to prove to his parents that he can make it on his own?

Personal Financial Literacy Vocabulary
Budget: A plan for managing money, dividing up expected income
and expenses among spending and saving options based on personal goals during a
given time period.
Expenses: The costs of goods and services, including those that are
fixed (such as rent and auto loan payments) and those that are variable (such as
food, clothing and entertainment).
Financial goal: Desired results from ones efforts to achieve personal
economic satisfaction.
Fixed expenses: Expenditures that are the same from week to week or month
to month, such as mortgage or rent payments and car payments.
Fixed income: Income that stays the same from week to week or month to
month. Usually refers to income from pensions or bonds.
Income: Money earned from investments and employment.
Variable expenses: Expenditures that change from week to week or month to
month for food, clothing, recreation and entertainment, for example.
Variable income: Income that varies from week to week or month to month.
Introduction
Most of us work hard for our money. However, few of us can really explain what happens
to it each month. When the paycheck arrives, it seems like a lot of money but by the
end of the month, we are digging in our closet to find an old coat to see if there is extra
change in the pocket! What happens?

The reality is this: it is not how much money we make; it is how much money we spend. If
we do not learn how to control our spending, we will never have enough money to be
happy or to pay our bills. Wealthy people who are careless with their spending will
quickly become poor. On the other hand, moderate to low income people will become
wealthy if they practice good money management skills.
Lesson
One of the most important tools we can use to control our spending and to build wealth is
budgeting. While it may not sound like fun or may seem too restrictive, it will become our
road map to accomplishing our goals. But, what about the money needed to get there?
That is an instant reality check!
Budgets provide the answer to that question.
The Role a Budget plays in Personal Financial Planning
What do I need to know about budgets?
A budget is simply a monthly spending plan. Setting and following a budget puts us in
control of our income and guides us toward our personal dreams. It is like following a
roadmap when taking a trip.
A budget promotes smart spending habits. It helps us say no to the things that will
detour our trip. It helps us focus on our destination and establishes the route we take to
get there. In addition, a budget provides a safety net for emergencies or other bumps in
the road. Those bumps include impulse spending, overspending, unexpected expenses
and even bankruptcy. Monitoring what we spend is a lot easier than paying bills!

Who uses a budget?
Any time people figure out if they have enough money to buy something or decide how ot spend the
money, they are practicing elements of budgeting. The federal government uses a budget, your
school has a budget, the local hair salon has a budget, the committee to plan a field trip has a budget,
and most households have a budget. Any person, organization, business, or institution that needs to
decide how to spend money uses a budget.
Where would I find a budget?
Many families have a budget written out that shows how much will be spent in categories like rent,
utilities, food, and clothing. Other people keep exact records of all their expenses and income,
adjusting their budget frequently. Still others have a vague idea of where their money goes and keep
a budget of sorts in their head.
How does a person plan a budget?
Budgets are personal and unique to each situation. There are many decisions to make when creating a
budget. Some people choose to spend a greater portion of their money on a new car, while others
choose an older car and spend more money on clothes or housing. Some of these decisions influence
other decisions. For example, if you choose to buy a large house, then your electric bills will also be
larger. If you have a lot of medical expenses, you probably wont have as much to spend on
recreation or vacations. Budgets also must be flexible. When a persons income changes, the budget
must change, too.
As a general rule, these are some commonly used guidelines for creating a budget:

Charity: 10-15%
Saving: 5 10%
Housing: 25-35%
Utilities: 5 10%
Food: 5 15%
Transportation: 10-15%
Clothing: 2 7%
Medical/Health: 5-10%
Personal/Other: 5 10%
Recreation: 5 10%
Debts: 5 10%


Generally, the goal is to have ALL of your income planned to go SOMEWHERE.
Building a budget is personal and should align with our goals. While there are some basics
to follow, a budget is not a one size fits all plan. One of the best ways to start is by
writing down everything you spend for one month. That means EVERYTHING. Tracking
your spending is the only way to know where your money goes. It also helps you know if
you are spending money in a way that will accomplish your goals.


Budget Practice

Reggie
Anna
Sam
Net Monthly Income
1500
1500
1500




Expenses:



Rent
600
500
800
Transportation
50 (bus fare)
400 (sports car)
100 (motorcycle)
Savings
50
100
50
Utilities
150
100
300
Clothes
150
150
150
Entertainment
500
250
100




Total Expenses
1500
1500
1500

When Sam decides to rent a larger apartment, what other categories
of his budget are affected?
His utilities costs rise.
Why are Sams utilities higher than the others?
Because he has a larger residence which likely consumes more
energy.
What trade-offs did Anna have to make after choosing to own an
expensive sports car?
She could not spend more money in other areas of her budget.
Why do you think Reggie chose to spend only $50 for transportation
by riding the bus?
Because he could spend more in other areas like entertainment.
Other than rent, what budget category seems to be a priority for
Anna?
Transportation
Other than rent, what budget category seems to be a priority for
Reggie?
Entertainment
What categories would be the most important to you in creating your
own budget?
Rent and Transportation
What trade-offs would you make if you planned your personal budget
today?
I would sacrifice money in entertainment and transportation to gain
a quality residence
How is budgeting similar to goal setting?
You are setting a plan to follow that will help you in future success.

Spending Log
Keep a record of all of your spending for at least one week. But realize, a week may not be enough
time to really find all of your money habits. You may want to copy this page and keep track for a
longer period of time. Write down everything! You should also record how you were feeling at the
time. Emotions account for a lot of spending and you may not even realize it. See the example below.
Day
Time
Purchase
Amount
Thoughts/Feelings

Day Time Purchase Amount Thoughts/Feelings
Tuesday Morning Shorts $25.00 Needed more
clothes for
vacation
Tuesday Afternoon Coffee $2.99 Layover beverage,
tired
Wednesday night Movie ticket $10 Very happy; first
time hanging out
with my brother in
months
Thursday Noon Lunch at Fast
Food
$5 Not happy with
food choice but
had no other
option
Thursday night dinner $15 Very satisfied with
food and price
Friday Morning SeaWorld
admission
$45 Not happy as I
dont think it was
worth the price
Saturday All day Wax Museum,
ghiradelli,
souvenir
$25 Very exciting day:
very fun



After the week is up, look at your log. Do you see any patterns developing? What are some of the
triggers that start you spending? Do you see spending habits that you want to change? Total the
amount you have spent during this week. Are you spending more than you actually have?
A majority of the purchases happened due to being on vacation on the west coast including dinners,
attractions and other things. The triggers of course are the need to have a fun vacation. In total, I spent a
103$.

Lesson (Continued)
Fixed and Variable Income
Income is the money that you receive from employment or other sources. When preparing
a budget, you have to start by knowing how much you earn. Your earnings will limit the
amount of spending you have each month in order to pay your bills and save for future
goals.
Fixed income is income that is set each month; variable income is income that can
fluctuate each month. For example, if you have a monthly salary of $2,500, that income
remains the same from month to month. However, if you are paid per hour, your income
is based on the number of hours you workso your income may vary from month to
month. People earning commissions and those who are self-employed also tend to have
variable income. When budgeting, you need to average your income for the past 12
months to determine a typical monthly income. In some cases, you may have both fixed
and variable income sources. Suppose you work for a set number of hours each month and
are paid for those hoursbut you also have the option to work additional hours for more
pay, depending upon your schedule. Income from the set number of hours is fixed while
income from the additional hours is variable.
Fixed and Variable Expenses
Expenses are the costs you pay for the products you buy. Some expenses are fixed and others are
variable.
When preparing your budget, it is recommended to include deposits to your savings account as a
FIXED expense.
Fixed expenses are those payments and expenses that same the same from month to month.
Fixed expenses include things such as a lease or house payment, or a cell phone; you generally
have a contract for a set amount for those costs. They do not vary from month to month and will
not change until the terms of the contract change.
Variable expenses are those payments and expenses that tend to be different each month.
Variable expenses include anything over which you have control on a monthly basis. For
example, you can adjust your spending on utilities, gasoline, clothes, food, entertainment, and
many other products you buy each month. When making a monthly budget, fixed expenses are
setso enter them into your spending plan first. Then you can enter all other expenses and
allocate whatever income is left to cover them. Now that you have an understanding of the basic
components of a budget, you can build a spending plan that will help you accomplish your goals.



Student Budget Form
Use this form to complete your budget, based on the spending habits found on your tracking
form.
Allowance/Income ______________________ weekly 10 monthly 40
Many of these things are paid by my parents


Lunch $20 $60
Transportation FREE FREE
Contributions $0 $0
Savings $5 $20
Insurance $0 $0
Hobbies $5 $20
Movies $10 $30
Entertainment $15 $30

Snacks $5 $20
Clothing $40 $60
Downloads $3 $9
Cell phones $10 $40
Gifts $5 $20
Others $10 $20






This is an example of an actual budget sheet some people use for tracking expenses.

Conclusion
A budget is one of the most important tools an individual or a family can have to help manage
their financial resources. Without a budget, you are left guessing every month if you will have
enough money to get by. Budgets should be flexible and change with your needs (not your
wants!). Most successful money managers will review their budget at least once a year to ensure
they are on target for reaching their personal and financial goals.


Review
Which of the following is a fixed expense?
Rent
Food
Entertainment
Clothing

Which of the following is a variable expense?
Loan payment
Eating out
Garbage
Cable

Explain the purpose of having a budget.

A Budget allows you to track your spending and ensure that you are not setting
yourself up for financial failure




Identify the steps you would need to take to prepare a personal budget.
1. Research budgeting
2. Find your average spending
3. Find a path for future success
4. Create a physical budget



What role do needs and wants play in budgeting?
Often, people overspend on wants that are not required and not important. By avoiding
many wants, one can focus on their needs and make smart decisions.