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UNIT OF COMPETENCY
DEVELOP AND USE PERSONAL BUDGET
1. ANALYZE AND DISCUSS BUDGETING AS A FINANCIAL TOOL What is budget? Budget:- is a calculation of all projected income and expenditures for a period of time. And it showing all projections versus actual income and expenses for the period and monitoring variance and additional budget is: Planning but to express in terms of in amount.(money) Quantitative expression A list of income and expense in different group under different stage for future time period. Road map of your finance because of it will show how much you have to spend and how to need to spend it. Objective of budgeting 1. establishing specific goals 2. executing plans to achieve the goals, and 3. periodically comparing actual results with the goals What is financial tool? Financial tool: is the main instrument of the budget used to preparing the budget correctly. the role of budgeting in the lives of different groups such as : Families Governments Individuals such as : single, married, students, tourists The importance of setting financial goals financial goal is a goal used to handling or resolving the future happening things. To accumulating a set of money by a specified date in the future for the purpose of : purchasing assets, financial holidays, educational expenses To aiming to repay existing debts To establishing a regular saving plan Handling income and expenditures responsibly and avoiding financial difficulties There are many obstacles that are not suitable for financial goals: o Being unemployed o Insufficient income o Unexpected circumstance such as: losing job, falling ill, not being able to work o To be successful on budgeting it needs changing the behaviors and skills to control the budget activities: o Controlled spending o Disciplined approach to money o Record keeping skills 2. Develop a personal budget so this is the budget all that we discussed before as a result this unit of competencies talking about not organization or enterprise budget it is talking about personal or individual budget. Budget for personal or individual purposes are divided in to three parts: 1. Personal budget 2. Budget performance report (budget variance) 3. Budget allocation WHAT IS PERSONAL BUDGET
Personal budget: is a budget which includes all estimated income and expenditures of a person. It is preparing by two columns table What are the incomes and expenditures that are includes on budget: income: is an inflow of money by working or giving services for organization by different ways. Sources of income: from basic salary Form overtime From allowance Bonus Commission Benefit retirement Expenses are divided in to two: Expense: is the outflow of money for the purposes of individual requirements Fixed expense: is an expenses which remains constant. And the main fixed expenses are listed below: Insurance Fees such as : school and university fees and bank fees Public transport, rent Loan repayment (if loan is based up on fixed interest rates such as o Personal loan, car loan, credit card debt o Higher education contribution scheme Variable expense: is an expense which remains changed when the activities changed. The main fixed expenses may include: Car Maintenance Mobile expense, Utility expense Living expense such as food, clothing, medical. Miscellaneous expense such as gift, recreation, entertainment Loan repayment( if loan is based up on variable interest rates such as Personal loan, car loan, credit card debt Higher education contribution scheme To prepare the budget it needs: 1. Heading such as: Name of the person Name of the budget Specific date 2. Income section such as : Basic salary Allowance Overtime etc…… 3. Expenses section. both fixed and variable 4. Saving: is the difference between total incomes and total expenses EXAMPLE 1 When you prepare the personal budget by apply this form ATO KEBEDE Personal budget For the month of January 31, 2012
Description Estimated income and
expenditures or budget Income Basic salary 3000 Overtime 1000 allowance 500 Bonus 1200 Total income 5700 Expenses Rent expense 1000 Tuition expense 1200 Utility expense 500 Total expenses (2700) Saving 3000 3. IMPLEMENT AND MONITOR THE PERSONAL BUDGET The implementation of budget is connecting with comparing of the estimated budget with actual budget this is called budget performance report (budget variance). Budget performance report: a system of comparing the actual income and expenditures with the estimated income and expenditures this difference result shows the variance. Variance: is the difference between estimated budget and actual budget, this result forms to divide the variance in to two parts they are: 1. Favorable (positive) variance: is a variance that shows the surplus amount from incomes and expenditures by variable amount from estimated and actual budget. How this can be formed: Income level Estimated budget < actual budget => favorable or positive (+) Expense level Estimated budget > actual budget => favorable or positive (+) 2. Unfavorable (negative) variance: is a variance that shows the deficit amount from income and expenditures by variable amount from estimated and actual budget. How this can be formed: Income level Estimated budget > actual budget => unfavorable or negative (-) Expense level Estimated budget < actual budget => unfavorable or negative (-) Example 2 ATO KEBEDE Budget performance report For the month of January 31, 2012 Description Estimated Actual amount Variance Budget Income Basic salary 3000 3100 100 favorable Overtime 1000 600 400 unfavorable allowance 500 500 Balance Bonus 1200 1100 100 unfavorable Total income 5700 5300 400 unfavorable Expenses Rent expense 1000 1100 100 unfavorable Tuition expense 1200 800 400 favorable
Utility expense 500 500 Balance
Total expenses (2700) (2400) 300 favorable
Saving 3000 2800 200 unfavorable
3. BUDGET ALLOCATION Budget allocation: is the allocation of budget for the next months by using the previous month of budget variance. Simple it is the allocation of the previous month favorable and unfavorable amounts to the next month. This can be formed: When the income and expenses shows the favorable results, this increases the next month budget amounts, because it shows the surplus so as a result the next month budget increases When the income and expenses shows unfavorable results, this decreases the next month budget because it shows the deficit, so as a result the next month budget decreases NB: in the budget allocation time the estimated budget of the current month with the next month estimated budget must be equally with amount. Example 3 ATO KEBEDE Budget allocation For the month of February Description Allocated Variance of Allocated to budget for January February February Income Basic salary 3000 100 favorable 3100
Overtime 1000 400 unfavorable 600
allowance 500 Balance 500
Bonus 1200 100 unfavorable 1100
Total income 5700 400 unfavorable 5300
Expenses
Rent expense 1000 100 unfavorable 900
Tuition expense 1200 400 favorable 1600
Utility expense 500 Balance 500
Total expenses (2700) 300 favorable 3000
Saving 3000 200 unfavorable 2800
What is percentage of saving percentage of saving: Is a saving in percentage it is calculated from total incomes To show this: Percentage of saving= saving/total income*100% Percentage of saving used to know how we performed from percentage of 100% as well as to monitor or sustain this activities….
