Budgeting

Chapter 6

Budgeting

• Develop a clear understanding of goals– Short term (1 year)

• Usually smaller purchases, less expensive• Minimal impact

– Long term (over 2 years)• Larger purchases, more expensive• Impact life

– Prioritize• Your values, goals, hope, dreams• Current family• Future family

Factors going into a budget

• Income - $ coming in!!– Salary/Bonuses– Gifts– Dividends/Interest– Net income

• Expenses - $ going out!!– Fixed (little to no control, consistent)– Variable/Flexible (a lot to complete

control, inconsistent)

Budget tips

• Don’t spend every penny you receive• Keep excellent records

– Track income and expenses– Develop filing system

• Review your budget regularly– Revise and update as needed– Track over/under and adjust

• Personalize your budget• Evaluate trade-offs

Budget Tips

• Keep it simple and flexible

• Don’t follow someone else’s budget

• Don’t put unnecessary items in the budget

• Make sure to have an emergency fund included (2-3 months’ salary)

• Keep it realistic!

Budget Pitfalls

• Budgets that are too specific

• Predicting the wrong amounts

• Lumping too much under “Miscellaneous”

• Overlooking a budget (failing to take the time)

Sample Budget

Category Budgeted Actual Over/Under

Income

SALARY 1,500 1,498 -2

Fixed expenses

RENT 800 795 5

Flexible expenses

UTILITIES 300 320 -20

Savings

SAVINGS 100 100 0

Income Less Expenses and savings

300 283 -17

Transportation

Transportation

• Individual transportation – Bicycles – In-line skates – Motorcycles

• Public transportation

• Carpooling

How to Choose a Car

• General rule – 20% of take home pay • Can you afford it?

New or used? – Reliability – Cost – Mileage (odometer)

• Class, make, model • Do your homework (Blue Book, Edmonds’)

Choosing a car

• Features

• Options

• Dealer add-ons

• Extended warranty

• Safety features

• Used cars checklist

To Buy or Lease?

• Purchase– Investigate options (credit unions, banks,

special offers—do the math!)

• Leasing – Renting a vehicle

Lease Terms

• Gross capitalized cost – your cost (negotiate!) • Capitalized cost reduction – cash down payment • Acquisition fee – Setting up lease (including a

security deposit) • Residual value – predicted lease-end value

(purchase price at end of lease) • Money factor - interest rate you pay for

financing lease

Lease Terms

• Monthly payment

• Mileage allowance

• Excess wear fee – inquire about this before you sign!

• Disposition fee – fee paid when car is returned at end of lease (cost of getting car ready to sell to someone else)

Steps to Leasing

• Negotiate the price of the car (gross capitalized cost) Know the residual value (if 60%, you should expect to pay 40% over the term of lease)

• Down payment and security deposit • Financing • Return car (have mechanic look over first!)

You should consider a lease if you…

• Can’t pay cash for the new car you want Don’t drive a lot of miles

• Don’t keep your car for many years

• Keep your cars in excellent condition

The F&I Office (Financing and Insurance)

• Financing (F&I manager usually adds 1-2% on interest rate as commission for arranging loan)

• Insurance – Accidental Death and Dismemberment (pays off

the balance of lease or loan if accidentally die or are dismembered)

– Gap protection (pays the difference between what you owe and what your car is worth if it is totaled)

– Extended warranty (extends manufacturer’s warranty on certain parts or services)

Purchasing the car

• Invoice price – the amount the dealer paid from the manufacturer

• Do your homework! • Sticker price – the MSRP (Manufacturer Suggested

Retail Price 9-11% above invoice usually) • Fair profit – 3% above invoice • Take invoice, subtract rebates, add 3% • Trade in

– Sell yourself for more $$ – Do your homework first, if you decide to trade it in

Shopping for new cars

• Get referrals • No-haggle dealers (Saturn) • Shop on the Internet • Time to shop

– End of month – Cold months – September – Slow months, August/December

• Test drive

Negotiating

• Don’t be pressured • Don’t tell them what you can afford • Negotiate the price of the car first, (don’t

bring up the trade-in just yet!) • Explore other financing first • Doc fee, prep fee—look at all the charges

and QUESTION! • Do your homework!

Fees to expect to pay

• Sales tax

• Destination charge (shipping)

• License and registration

• Documentation fee ($50-$100 MAX!)

• Any add-ons you agree to!!!

• READ EVERYTHING!

Maintaining a car

• Owner’s manual • Maintenance schedule • Tires

– Inflated properly – Check tread

• Check your oil & have regular oil changes • Check all fluids • Get tune-ups regularly

Maintaining a car

• Brakes (good for about 40,000 miles) • Routine checks

– Belts – Windshield wipers – Check for leaks

• Exterior maintenance – Wash – Wax yearly

Maintaining a car

• Save your receipts– Repairs – Use dealership for warranty work – Dealerships rather expensive vs. repair shops – Get estimates before agreeing to work – Ask about guarantees

• Lemon Laws – Defect cannot be fixed after 3-4 attempts – Car in shop for 30 days or more during warranty period – Numerous major problems

Home Ownership

How to Buy a Home?

Video

Housing Options

• Parents’ Home • Dorms

– Apartments – Efficiency apartment/loft

• Duplex – Condominiums/Townhouses – Association fees

• Mobile home

Sharing Housing Costs

Roommates should discuss and agree upon:Roommates should discuss and agree upon: – Neatness – House guests – Quite time – Personal space – TV and stereo use – Phone use – Pets

Sharing Housing Costs

– Divide responsibilities – Cooking – Dishwashing – Cleaning – Grocery shopping – Expenses (rent, utilities, phone, groceries)

• Furnishings and decorations • Make a written agreement

Renting an Apartment

• Rent should be no more than 1/3 net pay (amount remaining after deductions) Consider: – Convenience – Neighborhood – Environment – Size and condition – Facilities – Pets

Renting an Apartment

– Searching – Referrals – Newspaper – Internet – Real Estate Agents

• Apartment Managers

Renting an Apartment

• Lease terms – length, rent, due date, security deposit, utilities covered, facilities, restrictions, pets, rules, repairs, visitation, notice

• Make a list of existing damage before you move in, in the presence of landlord

• Packing, reserve truck early • Change-of-address cards • Set up utilities

Buying a Home • 2.5 times your gross income

– Mortgage (property serves as collateral for loan)– Principal (amount you borrow)– Down payment (% of the purchase price up front….usually around

20%, but may vary)– Example: interest=9% on $100,000 loan for 30 yrs. total interest of

$151,732– Points (service fees by lender, each point = 1%..additional int.)

• Closing costs (collection of fees to cover tasks of lender)• Homeowner’s Insurance

– Property taxes • Mortgage insurance (if gov’t insured loan, mortgage may also

include mortgage insurance. In exchange, you get a loan with a smaller down payment)

Types of Mortgages

• Fixed (interest rate remains the same, usually last from 15 – 30 years)

• Adjustable-rate (ARM) – Interest rate goes up or down based on economy rising or falling

• FHA (Insured by Federal Housing Administration to reduce the down payment 3 – 10%, protects the lender not you)

• VA (Military veterans @ favorable rates, insured by the Veteran’s Administration)

• Graduated-payment (small payments now and go up on a regular schedule over time)

Benefits of Home Ownership

• Appreciation

• Interest and taxes deductible

• Equity (difference between what a home is worth and what the buyer still owes on the mortgage)

Shopping for a Home

• Consider your needs and wants • Real estate agents (MLS..Mulitple Listing Sites) • Be thorough in investigating houses • Have a house inspection done professionally

– Process – Offer – Counter offer – Acceptance

Buying a House

• Find mortgage

• Set closing date

• Request an attorney

Furnishing your Home

• Make a plan on what to buy – Quality vs. price – Hardwood (maple/oak) vs. softwood

(cedar/pine)

• Look for bargains

• Check energy labels/long term expenses

Elements of Budgeting

Food, Clothes & Fun

What are your favorite foods?

• Pizza

• Asian food

• Soul Food

• Pasta/Italian

• Watermelon/Fruit

• Cake/Pie/Desserts

A Balanced Diet

• Your body needs nutrients to stay healthy • There are six major nutrients that help

your body run. – Carbohydrates – Protein – Fats – Vitamins – Minerals – Water

The Food Guide Pyramid

• The healthy way of life is to eat a balanced diet.

• The food pyramid is based on scientific research on foods and nutritional needs. – Divides food into groups – Is divided into servings – Is changing

Food Pyramid

Tips for Making Good Food Choices

• Eat a variety of foods each day

• Choose foods that are low in fat and cholesterol

• Eat plenty of fruits, vegetables, and whole-grain products

• Limit your consumption of sugar and salt.

Avoid Dietary Problems

• Fast Food • Dieting • Eating Disorders

– Anorexia nervosa – Bulimia – Obesity

• * The only healthy way to lose weight, keep it off, and remain healthy is to eat a balanced diet and exercise regularly*

Article!!

Shop for a Healthful Diet

• Determine budget

• Make a list

• Look for coupons/specials

• Don’t shop when hungry

• Take advantage of sales

• Resist impulse purchases

Understanding the Language

• Fresh: product must not have been pre-cooked, altered, or frozen Low fat: 3 grams of fat or less per serving

• Sugar free: less than .5 grams of sugar per serving

• Reduced calories or LIGHT: no more than ¾ of the calories of the product to which it is compared

Understand the Language

• MORE of an ingredient: at least 10% must have been added High fiber: 5 grams or more of fiber per serving

• Cholesterol free: less than 2 milligrams of cholesterol and 2 grams or less of saturated fat per serving

• Low sodium: less than 5 milligrams of sodium per serving

Understand the Language

• Fortified: vitamins and minerals have been added Enriched: vitamin B complex and iron have been added

Nutrition Labels

– Fair Packaging and Labeling Act requires certain info to appear on every food package and standardized

– Serving size – Daily values – Ingredients

Other Shopping Info

• Freshness date – expiration date 060905

• Unit Pricing – By law grocery stores must state – Allows you to truly compare

• Be cognizant of store psychology!

Choosing A Professional Wardrobe

Letterman’s Top Ten

I’m Searching ForSomeone Who….

How much do you spend on clothing a year?

• Americans spend more than $400 billion each year to buy clothes

• There are three benefits of clothes – Utility: usefulness – Style: characteristics of clothing, differentiate – Value: the most you can get for price.

Shopping for clothes

• Know what you want

• Know how much you can spend

• Know where to shop

Natural Fibers

• Come from plants or animals • Cotton – boll of cotton plant, shrinks, wrinkles,

but durable and comfortable • Linen – fibers from flax plant – lightweight, cool,

wrinkles easily • Wool – fleece of animals – warm, absorbs,

resilient, soft but may be scratchy • Silk – secretion from silkworm that it uses to

build its cocoon, luxurious, unique luster – cool in summer, warm in winter, durable, but expensive and require dry cleaning or hand washing

Manufactured Fibers

• Rayon – one of most versatile, soft, lustrous, and blends well Acetate – becoming popular, less expensive alternative to rayon, not as strong as rayon, soft lustrous, easy-care

• Nylon – strongest most durable synthetics, feels soft and silky, washable, seldom requires ironing

• Polyester – most widely used manufactured fiber, wrinkle-resistant, easy-car, permanent press

Recreation and Travel

• Budget

• Set your priorities – Equipment (golf, hockey) – Facilities (tennis courts) – Save for what you want

• Start small (try before you buy)

• Evaluate alternatives

Vacations

• Travel guides

• Internet

• Transportation – Car – Bus – Train – Air

• Accommodations – hotel, youth hostels

Airfare tips

• Advance purchase • Saturday night stay • Be flexible (time, day) • Off-peak • No changes! • Get seat assignments

early • Sign up for frequent

flyer miles

• Check in early • Make sure you have

all necessary documents