There are many ways to approach teaching the subject of budgeting and many of them are good. In this Economic Literacy Education program we use an approach that is a little different from other budgeting classes.
We approach the budget in the way that bankers approach the budget. The banking, or lending, industry states that no more that 29% of your gross income should be spent on housing and that means either your rent or the amount you pay for your mortgage which includes principal, interest, taxes and insurance.
Further, the banking industry follows a guideline that no more than 40% of your gross monthly income should be used for housing costs and to service regular monthly debt. That regular monthly debt could be car payments, credit card payments, or student loan payments. So if you need the entire 29% of your gross monthly income for rent or home mortgage payment you will have only 11% of your gross income left for regular monthly debt servicing.
Let’s stop for a minute and talk about the difference between gross monthly pay and net monthly pay.
Gross monthly pay is your pay before any deductions are made for taxes or insurance. Gross annual pay is the amount of money you make each year before any deductions are made for taxes or insurance.
Net monthly pay is your pay after any deductions are made for taxes or insurance. Net annual pay is the amount of money you make each year after any deductions are made for taxes or insurance.
In this chapter we work with the gross
pay figure. There are two reasons for this. First, it is easier
to figure gross pay (For gross monthly pay, multiply hourly pay times
2080 and divide by 12). And second, and more important, when lenders decide
whether or not you can afford to repay a loan they make these decisions
based on the gross monthly pay figure. So during this chapter we will
work with your gross pay.
Now please review the Budgeting Table of Contents. You see that this unit is divided into four parts.
- Budget Introduction – this page tells you how to use this text book.
- Calculating the Budget – this is a lot of work so you will need a calculator and pencil. You may also need to locate
- Your last year’s tax return
- Your most recent pay stubs
- Records of your monthly bills
Once you have all your materials together you will need to start the work of
- Calculating your average monthly income that can be used for monthly bills
- Calculate the amount of money you can afford to spend on each category of your household budget according to the guidelines of this book
- Calculate how much you are actually spending in each category
3. Planning the Budget
In this portion of the lesson you develop a plan that will help you set up a budget for your household and stay on it.
Here you will explore and discover some ways that you can save money so you can deposit into your IDA savings account regularly.
Read the page 1 Budgeting introduction. From this you can see that a household budget is a tool that will allow you to take control of your money. |
Review pages 2, 3, 4 and 5 |
Page 2 shows the guidelines for a household budget for a household with no child care costs.
Page 3 is the worksheet you will soon complete to figure your own model household budget if you have no child care costs.
Page 4 shows the guidelines for a household budget for a household with child care costs.
Page 5 is the worksheet you will soon complete to figure your own model household budget if you do have child care costs.
This exercise is really important and the information you will use to complete the worksheet on either page 3 or page 5 is important to help you take control of your money. This is a lot of work, but it is very important work.
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Review pages 6, 7, 8, 9 and 10.
You may need to complete all 5 of these pages as the first step toward figuring your gross monthly income. Or if you only have one source of income you will only need to complete pages 6 and 10. If you have two sources of income you will need to complete pages 6, 7 and 10. And so on.
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Look at page 6 and read the instructions at the top of the page.
1. Explains how to complete page 10 if
your income is a fixed monthly amount.
2. Explains how to complete page 10 if your income is a fixed annual amount.
3. Explains how to complete page 10 if you are paid hourly. You will need to convert your hourly rate of pay into a gross monthly income amount before you can complete this exercise.
Remember, if you have more than one source of income use a different worksheet for each source. For example, both you and your spouse could work and earn an income so use a worksheet for each of you. You may have more than one job. Use a different worksheet for each job. You may receive a monthly child support payment or social security benefit payment. Complete a worksheet for each of those payments.
Some of your income could be hourly, such as the income you receive as wages when you work.
Some of your income could be sated in a monthly amount such as your child support payment.
When you have completed page 10 you are ready to do the exercise on page 3 (if you have no child care costs) or page 5 (if you do have child care costs.) |
Review – When figuring budgets in the format we use to figure household budgets we work with your gross pay.
Page 11 – Remember the homework you did before this class. You had to collect your current actual budget expenses and determine how much you are actually spending in each category. Now is the time to pull that worksheet out.
On page 11 enter the amount you are actually spending in the blank at the right in each of the budget categories.
Total your actual expenses. |
Page 12
1. Take the figures off page 3 or page 5 and enter them in the first column “Figure from Budget Worksheet.
- Take the figures off page 10 and enter them in the middle column “Figure from My Budget.”
- Calculate the difference in each category and write that difference in the last column labeled “Difference”.
Now look at the bottom of page 12. This is where you will set your budget goals. First determine and write down your Financial Plan and what adjustments will I make to balance my budget.
Next complete the Time Line portion of the worksheet. Here determine how long your will need to meet these budget goals and enter that in the Time Line. |
Read page 13 – Ten Basic Rules of Money Management. These are good rules developed by a very good credit counseling agency, Credit Counseling of Arkansas. |
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Read pages 14 and 15 –
The Envelope Method. – Carefully think through your own money
and your own expenses. On page 15 fill in the “other”
line from Category one – Checking and Category two –
Savings and Category three – Cash in the envelope.
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Read page 16 – Where
Did All the Money Go? – Remember your assignment for this
lesson. Does it make even more sense now after reading this page?
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Read page 17 – I’m
Too Poor to Save! – Do you understand how saving even a little
bit regularly can help you acquire a lot of money over a number
of years?
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Read page 19 – Lower
Your Grocery Bill – Can you think of ways to lower your own
grocery bill?
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Read page 20 – Save
on Entertainment – Can you think of additional ways to save
on entertainment?
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Read page 21 – Creative
Savings – Can you think of other ways to save money regularly?
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 Click here to download the handout for Budgeting |
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