Chapter 8Chapter 8

BudgetingBudgeting

BudgetingBudgeting

Budgeting or a spending plan is a process of income allocation for spending need

Prior to that individual should determine their financial goals

Budgeting is based on past expenses of the items The budget would involved the expected monthly

income & expenses and carried out for one year It is budgeted before the income or expenses

occurred Categories of items are written in the spending

plan

The Importance of BudgetingThe Importance of Budgeting Helps individual to save to purchase for items Helps individual to save to purchase for items

needed, thus reducing the use of creditneeded, thus reducing the use of credit Enable an individual to live within his incomeEnable an individual to live within his income One way to overcome financial tense in family One way to overcome financial tense in family

due to financial mattersdue to financial matters Helps to keep records for items that are Helps to keep records for items that are

taxable for the purpose of income taxtaxable for the purpose of income tax Enable the individual to control and record Enable the individual to control and record

expensesexpenses Enable specific financial goals to be achievedEnable specific financial goals to be achieved Helps individual to be prepared for financial Helps individual to be prepared for financial

emergencies emergencies Assist the individual in directing the income to Assist the individual in directing the income to

important expensesimportant expenses

Objectives of BudgetingObjectives of Budgeting

1. To implement a proper & disciplined spending – individuals must follow the amount allocated

2. To reduce amount of money wasted through unnecessary spending by

Reducing interest for credit Buying items that involved large sum of

money at different period of time (eg. Different months)

Discussing with family members the items that should be bought at certain time

Budgeting (cont.)Budgeting (cont.)

There are 3 steps in budgeting1. Planning the spending plan Estimating available income Defining major expense categories &

setting budget levels2. Implementing the spending plan3. Evaluating the spending plan

Steps in BudgetingSteps in Budgeting1. Planning the spending plani. Estimating available income Income are identified, make a list or table of

income that might be received the following year Income may be based to the past income with a

little adjustment Income include:

Salary (later minus the income-tax) Dividend from investment Bonus from investment or salary, profit from business Borrowed money Money from working children Rental from tenant Debt repayment by others to you

Steps in Budgeting (cont.)Steps in Budgeting (cont.)

Table of Income(for next year)

Sources of Income

Frequency RM (monthly)

Salary Monthly 2,800

Rental Monthly 800

Profit from shares of capital

Once in 2 years, not receiving next year

-

Total income 3,600

Steps in Budgeting (cont.)Steps in Budgeting (cont.)ii. Defining major expense categories & setting

budget levels Consider the spending habit of family

members & discussed Review the suitability of financial goals Allocate amount of money for expenses:

Identify the expenses & the amount that will be spend the following year by referring to expenses made in the previous year (Worksheet for Recording Expenses)

For annual expenses (once a year), calculate the average monthly expenses

Worksheet for Recording Expenses (reference for next year)

Date Items Amount (RM)

Categories Total amount for categories (RM)

Cumulative total for month

3/114/116/1110/1111/1112/1123/11

FoodCar installmentRentalFoodLife insuranceSportswearFood

29038030080

180260150

-Car

installmentRental

-Life

insuranceClothes

Food

-380300

-180260520

Total for November

1,610 1,610

5/126/128/1215/1220/1222/12

RentalFoodCar installmentLife insuranceSchool uniformFood

300160380180310510

Rental-

Car installment

Life insuranceClothes

Food

300-

380180310670

Total for December

1,840 1,840

Budgeting (cont.)Budgeting (cont.)Table of Past Expenses (used the amount for next

year)Categories of Expenses

Frequency Total a year (past)

RM

Monthly expenses (past) RM

Clothes-school uniform-sportswear-clothes for festive seasons-casual wear- office attire

Once a year (December)Twice a year (January, June)Twice a year

Twice a year (March, August)Twice a year (April, October)

350480

1,300

770820

310

Total for clothes 3,720

Food-food at the office & school-food at home-outside eating - food for festive & party

5 days a week

EverydayOnce a week4 times a year

3,800

5,0001,000400

850

Total for food 10,200

Steps in Budgeting (cont.)Steps in Budgeting (cont.)2. Implementing the spending plan Use a summary of the budget (table) to monitor

and control expenses When spending, keep all records related to

expenses. Eg. Receipts for payment of utility bills, purchasing items receipts, receipts of payment of fees, statement on depositing money for payments of car loan, home loan

Write down all expenses for a certain category of expenses & get the monthly total amount. Eg. Clothes, food

Some items may not be categorised eg. Car installment, electricity bills

For annual expenses, write down the actual amount spent in the specific month

Table of Budget SummaryTable of Budget SummaryMonthly Spending

Plan

January

(RM)

Surplus(Deficit)

February(RM)

Surplus(Deficit)

Total Income 3,600 3,600 - 3,600 -

Expenses

FoodClothesHouse rentalCar installmentIncome taxCar insurance & road-taxTelephone billElectricity billWater billLife insuranceOthers

850310300380280 60

35 30 45180150

880250300380

-720

402535

180480

(30)60--

280(660)

(5)5

10-

(330)

900-

300380

--

453540

18080

(50)310

--

28060

(10)(5)5-

70

Total expenses

2,620 3,290 (670) 1,960 660

Savings

EmergencyLong-term

50930

50260

-(670)

501,590

-660

Total savings 980 310 (670) 1,640 660

Steps in BudgetingSteps in Budgeting (cont.)(cont.)

3. Evaluating & reviewing the spending plan Evaluate the spending plan to identify any

major differences in expenses or whether the actual spending conform to the budget for that year

Review the spending plan in periodical. For eg. Review every 3 months

The review is to ensure that the spending plan or budget is suitable with current changes

Eg. Changes in family life-cycle, changes in wants, inflation

If there is any changes in the price or wants of family members, then the spending plan will also be altered

Budgeting (cont.)Budgeting (cont.)

The income for each month may not be the same The income for each month may not be the same due todue to

Increase in income starting at certain month Increase in income starting at certain month (annual increment for permanent job)(annual increment for permanent job)

Increase in income due to job promotionIncrease in income due to job promotion Bonus or dividend obtained from investment at Bonus or dividend obtained from investment at

certain month, usually at the end of the yearcertain month, usually at the end of the year Profit from business incurred once in 2 or 3 Profit from business incurred once in 2 or 3

monthsmonths House rental may differs as tenant move out or House rental may differs as tenant move out or

new tenant moves innew tenant moves in

Budgeting (cont.)Budgeting (cont.)The expenses for each month may also differs due

to School fees are paid at the beginning of the year Other fees may be paid once in 6 months or so on Fees for higher education are paid at the

beginning of the semester eg. June and November Car insurance, road-tax and driving license are

paid once a year Expenses for festive seasons or schools -

transportation, clothing & food for the specific festival or new school uniforms, books & other equipments

expenses during school holiday may increase with holiday tour

Budget (cont.)Budget (cont.) Expenses that exceeded the spending plan Expenses that exceeded the spending plan

will result in either the savings reduced or will result in either the savings reduced or the use of credit increasedthe use of credit increased

Expenses that exceeded income resulted in Expenses that exceeded income resulted in the use of credit, the use of cash advance the use of credit, the use of cash advance from credit card or borrowing from friendsfrom credit card or borrowing from friends

Together with the spending plan or Together with the spending plan or budget, need a list for sources of income, a budget, need a list for sources of income, a list of expenses for each item & for each list of expenses for each item & for each transaction occurred and also a table for transaction occurred and also a table for achievement of short-term & long-term achievement of short-term & long-term financial goalsfinancial goals

Budgeting ProblemsBudgeting Problems

Past mistakesPast mistakes Mistakes such as large department store bills or high Mistakes such as large department store bills or high

payments for non-essentials eg. car accessories would payments for non-essentials eg. car accessories would jeopardise the budgetjeopardise the budget

Rectifying the errors from previous expenses can help Rectifying the errors from previous expenses can help to ensure the success of the new budgetto ensure the success of the new budget

When the budget is finally started, it will be a When the budget is finally started, it will be a spending pattern that is more consistent with spending pattern that is more consistent with spending plans not as a spending pattern like before spending plans not as a spending pattern like before

Budgeting Problems (cont.)Budgeting Problems (cont.)Car paymentsCar payments When car payments were completed somewhere in the When car payments were completed somewhere in the

middle of the year, you should make provisions before middle of the year, you should make provisions before the year started to save an amount equal to the the year started to save an amount equal to the paymentspayments

Some people might simply increased the spending in Some people might simply increased the spending in other areasother areas

The saved amount from the supposed car repayment The saved amount from the supposed car repayment can help to increase usage of cash in the next car can help to increase usage of cash in the next car purchasing & lessen the car loan, thus reducing extra purchasing & lessen the car loan, thus reducing extra expense from loan interestexpense from loan interest

Budgeting Problems (cont.)Budgeting Problems (cont.)Two incomesTwo incomes The danger of two incomes is in getting used to living on The danger of two incomes is in getting used to living on

two salariestwo salaries Do not become dependent on the second incomeDo not become dependent on the second income Budget only the primary income for routine living expensesBudget only the primary income for routine living expenses The second income should be used for non-regular The second income should be used for non-regular

expenses such as for vacation or eating out frequently and expenses such as for vacation or eating out frequently and also for savings & building wealth also for savings & building wealth

If the second income is used for normal expenses, if it If the second income is used for normal expenses, if it stops, the normal expenses has to be reduced & this will be stops, the normal expenses has to be reduced & this will be difficultdifficult

Budgeting Problems (cont.)Budgeting Problems (cont.)Joint effortJoint effort Budget should be a family effortBudget should be a family effort In younger family, it involve both husband & wife In younger family, it involve both husband & wife If it is not a joint effort, there is little chance that it will If it is not a joint effort, there is little chance that it will

succeedsucceed In older families, other than the husband & wife, children In older families, other than the husband & wife, children

should involved in the budgeting process as they are also should involved in the budgeting process as they are also spending part of the family incomespending part of the family income

The budget is only a visible evidence that shows a family The budget is only a visible evidence that shows a family wants to control the way it spends moneywants to control the way it spends money

Full cooperation of family members are needed to make Full cooperation of family members are needed to make the budget work the budget work