Module 2 (3) Budgeting Flashcards
What is budgeting?
the process of estimating and tracking where money is spent each month in order to develop a clear picture of where the client’s money is usually being spent
What are the reasons for using a budget?
to accomplish specific financial goals by dedicating the right amount for the time frame
to avoid the need to use credit cards or other forms of debt for expenses that can be anticipated
a written plan, including goals such as a vacation or paying down debt, will let everyone in the family know why spending is being limited in one area or another and get everyone engaged in staying on track
when the family economics are complex (e.g., highly fluctuating)
when the client needs to identify where money is being spent
when its important to keep track of spending in one specific area or by specific individuals
when the family believes it is important to establish financial incentives for its members
when a family wants to shift or improve control of household expenses
What are budgeting advantages?
allows you to choose where you want your resources to go rather than be driven by habit
family stress and conflicts over money can be resolved before they become issues
chances of achieving financial goals increase if attention is paid to making sure the resources to save for the goal are available
provides a way to measure financial performance. It is a self-evaluation of progress (e.g., if you know what you want to spend at the grocery store this week, you have a much better chance of actually spending that or less)
reveals wasteful or inefficient spending patterns
requires the family to identify and deal with potential financial problems before they arise and consider possible alternative courses of action
may be used to establish financial goals and determine the feasibility of meeting them
What are disadvantages to budgeting?
time consuming–must be routinely reviewed. Without review, there is no benefit.
initially, there may be family conflicts on what is important and where to cut from expenses.
if inaccurate information is used to develop the budget, it will be of little or no value
using a budget as an absolute control of spending may preclude a client from taking advantage of opportunities that may aid in the reaching of goals
keeping accurate spending record is often difficult and some people resent it.
for the person who is successfully working toward hi/her financial goals, it may seem like an intrusion or an indication of mistrust
What are the steps to creating a budget
Step 1: identify the clients goals and determine what is required to reach them
Step 2. estimate income from all sources
Step 3: estimate expenses–these should be divided between fixed and variable
Step 4: compare income and expenses to determine if expenses are equal or less than expected income
Step 5: if expenses are too high, attempt to identify potential sources of additional income or places where you can cut
Step 6: present each category of income/expense as a percentage of the total
Step 7: Once the budget is finalized for the year, it’s important for the client to establish a process at the end of each month to review the budget and make adjustments
What might fixed expenses include?
housing: mortgage, rent, assessments
property taxes (if not included in housing)
local taxes
car payments
debt repayment
medical, long-term are, life and disability insurance premiums
property and liability insurance premiums
child care req’d for work
What are variable expenses
income taxes (may also be fixed expense–depends..)
FICA
utilities
entertainment/recreation
medical/dental out of pocket expenses
transportation/parking
current education expenses
household maintenance and supplies
vacations
food, groceries
clothing, including laundry and dry cleaning
gifts and contributions
household furnishing
education fund
savings/investments
miscellaneous purchases
fixed or variable expense?
housing: mortgage, rent, assessments
fixed
fixed or variable expense?
child care req’d for work?
fixed
fixed or variable expense?
FICA
variable
fixed or variable expense?
entertainment/recreation
variable
fixed or variable expense?
local taxes
fixed
fixed or variable expense?
medical dental out of pocket expenses
variable
fixed or variable expense?
transportation/parking
variable
fixed or variable expense?
local taxes
fixed
